Option Topic 3

How does the binomial model account for volatility in the stock?
No useless thinking. Reality. Work continuously.
What should we do if the put price is overvalued?
Suppose that the current stock price is $100 , the exercise price is $100, the annually compounded interest rate is 5 percent, the stock pays a $1 dividend in the next instant, and the quoted call price is $3.5 for a one year option. Identify the appropriate arbitrage opportunity and show the appropriate arbitrage strategy.