For all questions, interest (r) and dividend (d) rates are continuously compounded unless specified otherwise.

1. r = 5% (c.c.), T (option expiry) = 6 months. Assume we have the following table of call option prices:

Strike Price Call Premium

K1 = 79 $6.06

K2 = 80 $5.62

K3 = 84 $3.67

a) Find so that K2 = K1 + (1 )K3.

b) Is there a possible arbitrage? Justify your answer.

c) If there is a possible arbitrage, what is your arbitrage portfolio?

d) Sketch (or use a spreadsheet graph; preferred!) the payoff and profit diagrams for you arbitrage portfolio at time T. (Unlike in class, dont neglect the FV factor for the cash flow!)

help with part b-d i do not know how part a i do