10. ABC stock is currently at 100. In the next period, the price will either increase by 5% or decrease by 5%. The risk-free rate of return per period is 3%. Consider a put option on ABC stock with strike K = 100.
(a) Set up a replicating portfolio to value the put.
(b) Suppose the put is trading for $2. Explain how you would exploit the resulting arbitrage opportunity.
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