a) The price of a non-dividend paying stock is $23.85 and the price of a six-month European put option on the stock with a strike price of $21 is $0.65. The risk-free rate is 3.5%pa. What should be the price of a six-month European call option with a strike price of $21?

b) Describe how you would set up an arbitrage strategy in this situation if the actual price of the European call option from part a. was $3. Determine the amount of money that you would make through this strategy.