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The next two questions are based on the following data for European options: Call price = $5, risk-free continuously compounded interest rate r = 5%

The next two questions are based on the following data for European options:

Call price = $5, risk-free continuously compounded interest rate r = 5% per year, stock price S = $55, strike price K = $55, time to maturity T = 1 month.

a. If the put price p= $9, show how to capture arbitrage profits in this market.

b. Suppose short selling of stocks is not allowed in this market. Can you still make arbitrage profits? Explain your answer.

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