a. A call option expires in three months and has X $40. The underlying stock is worth $42 today. In three months, the stock may increase by $7 or decrease by $6. The risk-free rate is 2 percent per year. Use the binomial model to value the call option.
b. A put option expires in three months and has X $40. The underlying stock is worth $42 today. In three months, the stock may increase by $7 or decrease by $6. The risk-free rate is 2 percent per year. Use the binomial model to value the put option.
c. Given the call and the put prices you calculated in parts (a) and (b), check to see if put-call parity holds.