Hi

I need help with Finance...

The current price of a non-dividend paying stock is $100. You also collect additional information on a series of options written on the stock, where X is the strike price: Maturity(in years), Call, Put, X:

1y, call=10, put=12.5, X= ?

2y, call=11.5, put= ?, X=102

3y, call=14, put=4, X=100

The one-year and two-year spot rates are r1 = 2% and r2 = 3%, and you have no access to 3-year zero coupon bonds.

(a) Assuming no-arbitrage, find the missing information in the table.

(b) Suppose that the 2-year put option is currently trading for $8.50. Is there an arbitrage opportunity? If so, explain how can you take advantage of it. What is your profit per trade?

(c) Assuming no-arbitrage, what is the three year forward rate, f3?

(d) Suppose that RBC offers a forward rate over year 3, f3(RBC) = 5%, for a loan or deposit of $10,000. Is there an arbitrage opportunity? If so, explain how you can use the 3-year options and the 1- and 2-year spot rates to generate a free lunch.