This is a problem that has TWO questions. Therefore, please choose TWO answers (one choice for each question) to get full credit for this questions, otherwise you will only get partial points.

A six-month European call option's underlying stock price is $86, while the strike price is $80 and a dividend of $5 is expected in two months. Assume that the risk-free interest rate is 5% per annum with continuous compounding for all maturities.

1) What should be the lowest bound price for a six-month European call option on a dividend-paying stock for no arbitrage?

2) If the call option is currently selling for $2, what arbitrage strategy should be implemented?

		1) theoretical price = $2.85
		1) theoretical price = $3.02
		1) theoretical price = $3.67
		1) theoretical price = 1.98
		2) arbitrage strategy: Buy the call and short the stock.
		2) arbitrage strategy: Buy the call and buy the stock.
		2) arbitrage strategy: Short the call and buy the stock
		2) arbitrage strategy: Short the call and sell the stock