ABC stock is currently at 100. In the next period, the price will either increase by 10% or decrease by 10%. The risk-free rate of return per period is 2%. Consider a call option on ABC stock with strike K = 100. 

(a) Set up a replicating portfolio to value the call. 

(b) Suppose the call is trading for $7. Explain how you would exploit the resulting arbitrage opportunity.