Suppose the S&R index is 4,200, the continuously compounding risk free rate is 5%, and the dividend yield is 0%. A 1 year 4,250 strike European call costs $275 and a 1 year 4,250 strike European put costs $110. Consider the strategy of buying the index, selling the 4,250 strike call, and buying the 4,250 strike put.

(a) What is the rate of return on this position held until the expiration of options?

(b) What is the arbitrage implied by your answer to part (a)?

(c) What difference between the call and put prices would eliminate arbitrage?