Use the following information to answer the next three questions.

Chatman Inc. stock currently trades for $50, but you believe the company's stock will fall dramatically in three months. Three month European call options on the stock have an exercise price of $55 and a premium of 1.25. The annual risk free rate is 2.5%. You want to create a portfolio that mimics the payoff of owning a 3 month european put on Chatman Inc.

1) Which of the following steps must you do in order to achieve this payoff?

Sell a call option and receive $250 for the option premium.

Buy the stock and pay $3850.

Invest $4500 at the risk free rate today.

None of the above.

2) What should be the price of 3 month European put option on Chatman Inc that has an exercise price of $55? (Do not enter a dollar sign when inputting your answer and round your final answer to two decimals.)

3) Suppose that 3 month European put options with an exercise price of $55 are selling for $5.41. Which of the following statements is true?

		An arbitrage profit of approximately $50 per put can be made by selling puts in the market and creating a long position in synthetic put options.
		An arbitrage profit of approximately $50 per put can be made by buying puts in the market and creating a short position in synthetic put options.
		The market is in equilibrium.
		Cannot be determined without knowing the stock price when the options expire.