1. Currently, MOR stock is selling for $50. A European call option that expires in 90 days with a strike price of $51 costs $0.45186. A European put with the same strike price costs $1.20. Use Actual/360 for calculating interest rates here.

a. Suppose there is no way to borrow or lend at a risk free rate in this economy. Show how you can replicate a risk-free loan, using the assets described above. What is the implied annual interest rate (return) on your transaction? Three things to show: a payoff table proving youve created a risk-free payoff, the price of that portfolio today, and a calculation of the annual return. Your return will be a round %.

b. Suppose now that you discover the ability to borrow and lend at a risk-free rate of 3%. Show how you can make arbitrage profits in this situation. As before: try for certain cash today, but no future cash flows.