please answer question 3

2- Continuing with the information about the stock ABC in problem 1, assume T-bill rate is 6.25% and that the ABC stock pays a dividend of $1 just before the expiration of a call and a put option. Then the theoretical price differential ( c p ) should be: c-P = 5 3- So e 3- You strongly believe that the price of DEF Inc. stock will rise substantially from its current level nysh of S137, and you are considering buying shares in the company. You currently have $13,700 to 10 ll optibginvest. As an alternative to purchasing the stock itself, you are also considering buying call options on DEF Inc. stock that expire in three months and have an exercise price of $140. These call options cost $10 each.(per share) a. Compare and contrast the size of the potential payoff and the risk involved in each of these alternatives. Tcble Graph) b. Calculate the three-month rate of return on both strategies assuming that at the option expiration date DEF Inc.'s stock price has (1) increased to $155 or (2) decreased to $135. c. At what stock price level will the person who sells you the DEF Inc. call option break even? Can you determine the maximum loss that the call option seller may suffer, assuming that he does already own DEF Inc. stock? ( covered Call) 4- As an option trader, you are constantly looking for opportunities to make an arbitrage transaction (i.e., a trade in which you do not need to commit your own capital or take any risk but can still Stock make a profit). Suppose you observe the following prices for options on GHI Co. stock: $3.18 for Bond a call with an exercise price of S60, and $3.38 for a put with an exercise price of $60. Both options expire in exactly six months, and the price of a six-month T-bill is $97.00 (for face value Call of $100). Using the put-call-spot parity condition, demonstrate graphically how you could synthetically recreate the payoff structure of a share of GHI stock in six months using a a. call sell)