3. Explain what an arbitrageur would do in the following circumstances.

• $/SF exchange rate is $.51/SF, the Swiss risk-free rate is 4% per year, the US risk free rate

is 6% per year, and a SF Call option with an exercise price of $.50/SF and a three-month

expiration is trading at $.01/SF.

• $/SF exchange rate is $.48/SF, the Swiss risk-free rate is 4% per year, the US risk free rate

is 6% per year, and a SF Put option with an exercise price of $.50/SF and a three-month expiration

is trading at $.01/SF.

• $/SF exchange rate is $.52/SF, the Swiss risk-free rate is 4% per year, the US risk free rate

is 6% per year, and a SF Put option with an exercise price of $.50/SF and a three-month expiration is

trading at $.0075, and a SF Call with similar terms is trading at $.04