1. Suppose a stock is currently selling for $95 per share. You find a call on this stock with an $95 strike price and one year to expiration and a put with $95 strike price and one year to expiration. The call is currently selling for $5 and the put for $0.50. The current risk-free rate of interest is 5%. Using put-call parity, please formulate an arbitrage strategy and show how the arbitrage profits are obtained whether the stock price at expiration has increased or decreased.

2. Your uncle Bob wants to value an option on a stock. Please explain to him the information that he needs and how he can use it, as well as the information that he does not need in order to implement the binomial method.