For all problems where a risk free rate or a dividend yield is given, assume that the interest rate and the dividend yield are annual and continuously compounded rates.

Problem 9

Suppose that a one-year futures price is currently $159.5. A one-year European call option and a one-year European put option on the futures with a strike price of $159 are both priced at $6 in the market. The risk-free interest rate is 0% per annum. Identify an arbitrage opportunity by giving the appropriate arbitrage portfolio, and derive how much the arbitrage opportunity will return today