Homework answers / question archive / Example: Call is overvalued, arbitrage portfolio = - long postion in stock + cost of borrowing + short call = -SNd1 + PV(K)Nd2 + c When constructing an arbitrage portfolio/tracking portfolio, how does the positions/portfolio change when we have a put option? How does it change if the call or put is undervalued?

Example: Call is overvalued, arbitrage portfolio = - long postion in stock + cost of borrowing + short call = -SNd1 + PV(K)Nd2 + c When constructing an arbitrage portfolio/tracking portfolio, how does the positions/portfolio change when we have a put option? How does it change if the call or put is undervalued?

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Example:

Call is overvalued, arbitrage portfolio = - long postion in stock + cost of borrowing + short call = -SNd1 + PV(K)Nd2 + c

When constructing an arbitrage portfolio/tracking portfolio, how does the positions/portfolio change when we have a put option? How does it change if the call or put is undervalued?