Question: Explain the call-put parity relation and how it is justified. (50 marks). Black-Scholes-Merton Formula uses five variables to calculate the price of call and put

Explain the call-put parity relation and how it is justified. (50 marks).

Black-Scholes-Merton Formula uses five variables to calculate the price of call and put options. Explain each of these variables incorporated in the Black-Scholes-Merton formula. Show how the change in these variables affects the price of the option. Show how these variables are grouped to show the put-call parity relationship and suggest the condition in which there is an arbitrage opportunity. (50 marks).

(Note: Address each of the questions with a clear example).

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