Suppose: 1) 1 year futures price=$1000, 2) interest rate = 0%, and 3)for K=$1000, the premium on a 1 year call (C) is $100 and on a 1year put (P) $150.

a. Does put-call parity hold? If not, relative to each other which option is overpriced and which underpriced?

b. Describe a profitable and risk free arbitrage, that is, what would you long today and what would you short?

c. For your arbitrage described in question b. what are your profits/losses if the price of the asset in one year takes the following values: $800, $900, $1000, $1100, $1200, or $1300?

d. As you and others undertake the trades described in question b. how will prices adjust?