A stock currently trades at $45, but may increase to $60 or fall to $35 over the next year. The risk-free rate is 5%. Using the binomial method, value a call option and a put option, both with X= $50. Then verify that the prices you obtained satisfy put/call parity.
Suppose that the actual market price of the call option with X = $50 was $5. Demonstrate that you could engage in arbitrage to take advantage of this mispricing. You need to show the up-front profit and show that your position is risk-free over the year.