Under the binomial model, if a put is overpriced in the market, your most appropriate action is to write the put option and:
a. purchase stock and borrow
b. sell stock and lend.
The answer is B, but I thought it was A because when the put option is overpriced, you want to short sell it. But you need to buy the underlying stock to cover your put, so you would purchase the stock. I don’t know why it is to sell the stock
Put-call parity:
p0 + S0 = c0 + PV(X)
p0 = c0 + PV(X) − S0
If the real put is overpriced, you want to sell the real put and buy the synthetic put:
I just did a mock exam with that precise question where the correct answer was B) which I could deduce by the Put/Call parity, however why arent we also buying a call option on the stock ? The formula is clear on what we need to create a synthetic put as you detailed before and in order to profit from arbitrage in that scenario I thought we needed to replicated a synthetic put perfectly.
Cheers