Question 7 (5 marks) Suppose that a futures price is currently $42. A European call option and a European put option on the futures with a strike price of $40 and maturity in two months are both priced at $3 and $2 respectively in the market. The continuously compounded risk-free rate of interest is 5% per annum. Use the put-call parity condition to show that an arbitrage opportunity exists. Explain what position could be set up to exploit it. (Show all relevant calculations to support your argument. For example, your calculations should include what strategy an arbitrageur could follow in order to lock in a risk-free profit from the arbitrage strategy, as well as the arbitrageur's net profit from the strategy). Question 7 (5 marks) Suppose that a futures price is currently $42. A European call option and a European put option on the futures with a strike price of $40 and maturity in two months are both priced at $3 and $2 respectively in the market. The continuously compounded risk-free rate of interest is 5% per annum. Use the put-call parity condition to show that an arbitrage opportunity exists. Explain what position could be set up to exploit it. (Show all relevant calculations to support your argument. For example, your calculations should include what strategy an arbitrageur could follow in order to lock in a risk-free profit from the arbitrage strategy, as well as the arbitrageur's net profit from the strategy)