Consider a stock with European call and put options with exercise prices of $100 maturing one year later. The stock, call, and put are trading for $99, $4 and $2.50 respectively. Stock does not pay dividends and interest rates are 2%.
a. Are you able to make arbitrage profits? If so, how?
b. Suppose the stock and the call prices change to start trading for $90 and $3 respectively. What should be the price of the put to preclude arbitrage profits?