Problem 2 Consider European calls and puts with strike price K=$7 on a stock currently trading at 5. = $8.5. The options have 1 year to expiration and calls are at $1.5 while puts sell at $0.5. The stock will pay a dividend of $1 in 9 months. The risk-free rate is r = 1%. a) Find an arbitrage opportunity. Compute the arbitrage profit when S is $6 and $9 at expiration. b) Discuss the case when the dividend is not paid. Problem 2 Consider European calls and puts with strike price K=$7 on a stock currently trading at 5. = $8.5. The options have 1 year to expiration and calls are at $1.5 while puts sell at $0.5. The stock will pay a dividend of $1 in 9 months. The risk-free rate is r = 1%. a) Find an arbitrage opportunity. Compute the arbitrage profit when S is $6 and $9 at expiration. b) Discuss the case when the dividend is not paid