Question: solve QUESTION 3. This question has 2 subparts, please answer all subparts. I. Palatin (NASDAQ: PTN) has never paid a dividend and has no plans

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QUESTION 3. This question has 2 subparts, please answer all subparts. I. Palatin (NASDAQ: PTN) has never paid a dividend and has no plans to do so. It announced a 1 for-25 stock split to be taken into effect in August. PTN was trading at $0.23/ share in August just prior to the stock split, and September European call options on 100 PTN shares with strike $0.21 were trading at $0.01. The risk-free interest rate is 5% p.a. continuously compounded for all maturities. (a) Are there any arbitrage opportunities in which you earn an immediate profit? If there is, describe activities and cashflows for t=0 ONLY. (6 marks) (b) Would you answer to (a) change for an otherwise identical October American call option trading at the same price? Why or why not? (2 marks) (c) Describe adjustments to the call option after the stock split, support with calculations. (2 marks)

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