In this question we compare the options on specific stocks and the options on the index. The current IBM share price is $100 and the Intel share price is $50. The index is a simple average of the prices of the two stocks, which currently stands at$75.

Consider two alternatives.

i) Two call options (European) on the index with an exercise price of $75.

ii) One call option on IBM with an exercise price of $100, and one call optionon Intel stock with an exercise price of $50.

a) Assuming no arbitrage can we say which alternative should cost more?Explain.

b) Redo part a) assuming that in alternative i) the strike price is $70 and not$75.

c) Redo part a) but suppose that instead of call options we examine put options.

Please make sure you answer part c as well! Thank you!