Reconsider the determination of the hedge ratio in the two-state model (see Section 21.2), where we showed

Question:

Reconsider the determination of the hedge ratio in the two-state model (see Section 21.2), where we showed that one-third share of stock would hedge one option. What would be the hedge ratio for the following exercise prices:

(a) 120,

(b) 110,

(c) 100,

(d) 90?

(e) What do you conclude about the hedge ratio as the option becomes progressively more in the money?

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