(a) Suppose there is a put option with price P0=15 on an underlying asset (a nondividend paying stock) priced S0=50. The stock will either increase to S1u=100 or decrease to S1d=40 with equal probability. The risk-free bond return is R=1. What must the strike price K be in an arbitrage-free market? 1 (b) Now let P0=10 instead, but all the other numbers are as above and let K be the value you found in (a). Carefully show how you would set up a portfolio that exploits this arbitrage opportunity. That is, use the risk-free bond and the stock to replicate the put such that your portfolio generates a positive cashflow today T=0 and a zero cashflow tomorrow T=1. (c) What is the arbitrage-free price C0 of a call option with strike K (from (a) ) on the stock above