You happened to check the newspaper and noticed an arbitrage opportunity. The current stock price of Zahari Ltd is $20 and the one-year risk free rate is 8%. A one year put option on Zahari Ltd with a strike price of $18 sell for $3.33, while the identical call sells for $7. What is your arbitrage profit if you take advantage of the opportunity available to you? (8 marks)

(b) You own a put option on Ford stock with a strike price of $30. You paid $3 for the call option which will expire in exactly six months time. (i) If the stock is trading at $38 in six months time, what will be the pay out of the put? (2 marks) (ii) If the stock is trading at $38 in six months time, what will be the profit or loss of the put? (2 marks) (iii) If the stock is trading at $29 in six months time, what will be the pay out of the put? (2 marks) (iv) If the stock is trading at $29 in six months time, what will be the profit or loss of the put? (2 marks) (v) Illustrate using a payoff diagram showing the value of the call at expiration for (a) as a function of the stock price at expiration. (