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A charitable organization has issued a bond that gives the holder the option to cash in

the principal as either 10,000 or 20,000. This asset can be viewed as a 10,000

bond plus a call on 20,000 with a strike price K=0.5/

a) Can the bond also be viewed as a bond plus an option?

b) Explain how the two equivalent views are just an application of the Put-Call

parity

c) Suppose that you observe the following:

The price of a call option on the European Euro () is 0.055 $/. The price of a put

option on the is 0.045 $/. Both options have 135 days left to expiration and a strike

price of 0.85 $/. The current spot rate is 0.89 $/. The $-risk free rate is 3.5% and the

-risk free rate is 3.75%.

i) Is there an arbitrage opportunity? Why?

ii) Calculate the arbitrage profits and show the arbitrage transactions and

corresponding cash flows at t=0 (now) and at t=T=135 days later.