On July 1st, you notice the following quotes in the option market (supposedly perfect), the underlying (spot) asset being the (not dividend paying) FTSE 100 index:

Call 7,200 December: 377

Call 7,400 December: 278

Put 7,200 December: 276

Put 7,400 December: 384

The FTSE 100 index quotes 7,230 and the 6-month (annualized) interest rate in the money market is 2% (simple, or proportional, rate). You can take 6 months as 0.5 year.

a) What arbitrage involving these 4 options should you undertake?

b) Establish the precise sequence of cash-flows (i.e. the cash-flow at date 0 (July 1st) and the cash-flow at date T (December, 31st) induced by this arbitrage if you do not cancel, by either lending or borrowing, the initial (at date 0) cash-inflow or outflow.

c) What is the semi-annual IRR (Internal Rate of Return) of this sequence? Check that indeed it reflects an arbitrage.