Suppose that a non-dividend paying stock currently has a price of 60. In addition, assume that the stock price will rise to 65 or fall to 55 over the next one year. Suppose that there exists an one-year put option written on this stock. Its exercise price is 60. Assume the risk-free rate of interest with continuous compounding is 3% per annum. (a) (10 points) Compute the fair value of the one-year put option. (b) (10 points) The current market price of the one-year put option is 1.6. Is a costless arbitrage pro t possible, and, if so, how can it be earned?

6. (20 points) Suppose that a non-dividend paying stock currently has a price of 60. In addition, assume that the stock price will rise to 65 or fall to 55 over the next one year Suppose that there exists an one-year put option written on this stock. Its exercise price is 60, Assume the risk-free rate of interest with continuous compounding is 3% per annum (a) (10 points) Compute the fair value of the one-year put option. (b) (10 points) The current market price of the one-year put option is 1.6. Is a costless arbitrage profit possible, and, if so, how can it be earned