QUESTION 1: (5 points)

There exist call and put options on We 'R' Champions. Both options are EUROPEAN options, have an exercise price of $104 and the same expiration date. Each option is on one share of We 'R' Champions. The current share price is $100. The call price is $6. The put price is $4. We 'R' Champions will not pay dividends during the life of the options. The riskless interest rate over the period until expiration is 4%.

1. Are the options priced correctly? If yes, explain. If no, which option should be more expensive? (1 points)
2. Suppose that the market price of the EuropeanPUT option falls to$2. The call price remains $6. Is there a profitable arbitrage? If yes, design the arbitrage, show that it is riskless, and calculate its profit on expiration day. (4 points)