The premiums on 1-year, 100-strike, European call and put options on a stock

index are $9.82 and $6.34 respectively. The spot price of the index is $98 and the risk free

continuously compounded interest rate is 5%.

3. (16 Points) The premiums on 1-year, 100-strike, European call and put options on a stock index are $9.82 and $6.34 respectively. The spot price of the index is $98 and the risk free continuously compounded interest rate is 5%. (a) State the necessary conditions and assumptions required for the put-call parity to hold. [3 points] (b) Validate that the law of no arbitrage is violated at the given price levels of the put and call. [3 points] (c) Assuming that the call is the mispriced option, construct an arbitrage strategy explicitly showing the positions taken and the resulting cash flows. Use a cash flow table to illustrate the results. [10 points]