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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
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=$120 (up state) and ds0=$90 (down state). a. What would be the call option hedge ratio for each of the following exercise prices: $120,$110,$100,$90, given the possible end-ofyear stock prices, us0=$120 (up state) and ds0=$90 (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? Decreases to a minimum of 0 Increases to a maximum of 1.0 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=$120 (up state) and ds0=$90 (down state). a. What would be the call option hedge ratio for each of the following exercise prices: $120,$110,$100,$90, given the possible end-ofyear stock prices, us0=$120 (up state) and ds0=$90 (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? Decreases to a minimum of 0 Increases to a maximum of 1.0
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