Big Orange ("BO") is a company that does not pay dividends. Its share price is currently $60. The riskfree rate of interest is 8% per annum continuously compounded.

A European call option written on BO has a $68 strike price and one year to expiry. The Black-Scholes model tells us that this call option should be trading at $4.82, yet we see it trading in the market at $4.50.

Similarly, there is a European put option written on BO which also has a $68 strike price and one year to expiry. The Black-Scholes model tells us that this put option should be trading at $7.60, yet we see it trading in the market at $7.90.

The mispricing of these two BO options presents an arbitrage opportunity. Explain the trades that must be entered today in order to capture the arbitrage profit on offer. You must be very clear as to what each trade requires.

You do not need to prove that your trades generate an arbitrage profit at Time T. All that is required is that you specify the necessary trades at Time 0. (Marked out of 5.00)