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% 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% per year. Use the binomial model to value the put option.
c. Given the call and put prices you calculated in parts (a) and (b), check to see if put-call parity holds.