6. In a one-period binomial model with S (0) = 4, u = 2, d = 0.5, r = 0.25 consider a European call option with strike price K = 5. i) Define arbitrage. ii) Show that if the price of the option is 1.21 an investor can set up a portfolio to profit from this arbitrage situation. iii) Show that if the price of the option is 1.19 an investor can set up a portfolio to profit from this arbitrage. iv) What is the no-arbitrage condition? Calculate the profit if the investor buys the stock and the stock price goes up. 6. In a one-period binomial model with S (0) = 4, u = 2, d = 0.5, r = 0.25 consider a European call option with strike price K = 5. i) Define arbitrage. ii) Show that if the price of the option is 1.21 an investor can set up a portfolio to profit from this arbitrage situation. iii) Show that if the price of the option is 1.19 an investor can set up a portfolio to profit from this arbitrage. iv) What is the no-arbitrage condition? Calculate the profit if the investor buys the stock and the stock price goes up