Throughout this problem assumes that all cash flows are realized at the end of any given period. All periods are one year long. The risk-free interest rate is 5% per year, while the cost of equity is 6% per year for all companies under consideration. Company A will make a dividend payment of $10 in one year, which will then grow at a rate of 2% per year forever after.

The stock price for company C is described by the binomial model. Company Cs current stock price is $250, and company C does not make any dividend payments. Next year, the stock price of company C can either increase by 20% or decrease by 10%. A put option with an exercise price of $260 is traded on the stock of company C.

1) What is the hedge ratio for the put option? 2) Should you buy or sell stocks on company C in order to obtain the risk-free portfolio? 3) Describe the risk-free portfolio in detail. 4) Calculate the put premium.

The call option on the stock of company C with the same exercise price as the put option is traded at $10.

5)Does the call premium fulfill the put-call parity? 6) Show in detail how you can obtain an arbitrage profit.