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Basic Question 5 of 8

If the market price of a European put option is lower than the price suggested by the one-period binomial model, what is the appropriate arbitrage strategy?

A. Sell the put option and short the underlying.
B. Buy the put option and short the underlying.
C. Buy the put option and long the underlying.
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User Contributed Comments 2

User Comment
vi2009 for puts => long or short positions in BOTH instruments

not for calls though ...
RAMOST Thanks vi2009
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You have a wonderful website and definitely should take some credit for your members' outstanding grades.
Colin Sampaleanu

Colin Sampaleanu

Learning Outcome Statements

explain how to value a derivative using a one-period binomial model

CFA® 2024 Level I Curriculum, Volume 5, Module 10.