Reconsider the determination of the hedge ratio in the two-state model where we showed that one-third share of stock would hedge one option. The possible end-of-year stock prices, uS₀ = $115 (up state) and dS₀ = $71 (down state). a. What would be the call option hedge ratio for each of the following exercise prices: $115, $100, $85, $71, given the possible end-of-year stock prices, uS₀ = $115 (up state) and dS₀ = $71 (down state)? (Round your answers to 3 decimal places.)

b. What do you conclude about the hedge ratio as the option becomes progressively more in the money?

multiple choice

• Increases to a maximum of 1.0

• Decreases to a minimum of 0