QUESTION $2.[3$ points$]1.$ Consider the case of European IBM call and put options

that have exercise price of $$110$ and expire in two months. The price of the call is $$3,$

and the price of the put is $$10.$ Assume IBM is expected to pay no dividend in the next two months. Suppose also

that the current price of IBM stock is $$95.$

$2-1.$ Based on put$-$call parity, construct portfolio B equal to Portfolio A$.$ Specify the strategy, maturity and face$-$value.

Portfolio $B=$

$2-2.$ What is the cost of Portfolio A & B today? What is the payoff of Portfolio A at the maturity? Bond$-$equivalent

yield on a two$-$month T$-$bill is $10\%$ nonannualized.

Cost of Portfolio A today $=$

Cost of Portfolio B today $=$

Payoff of Portfolio A at the maturity $=$

Payoff of Portfolio B at the maturity $=$

$2-3.$ A profitable arbitrage strategy is to long$/$buy $(x{)}_{?}$ and short$/$sell $(Y)$ this year and hold this position until next

year. Choose the correct strategies $($Strategy A or Strategy B$)$ in each blank $($X$)$ and $($Y$).$

a$.(x)$:$A,(Y)$:$B$

b$.($X$)$:B$,($Y$)$:A

c$.($X$)$ A$,($Y$)$:A

d$.(x)$:$B,(Y)$:$B$

e$.$ no arbitrage opportunity exist