In a binomial model,if the call price in the market is higher than the call price given by the model,you should
A)sell the call and sell short the stock
B)buy the call and sell short the stock
C)buy the stock and sell the call
D)buy the call and buy the stock
E)none of the above

Question

Quizplus · Accepted Answer

If the call price in the market is higher than the call price given by the model, it indicates that the call is overvalued in the market. Therefore, you should sell the overvalued call and hedge by buying the stock, which is option C. This strategy profits from the call's overvaluation while hedging against movements in the stock's price.

In a Binomial Model,if the Call Price in the Market