Question

a. If, in a two-state model, a stock can take a price of $120 or $90, what would be the hedge ratio for each of the following prices: $120, $110, $100, $90? (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 2 decimal places.)

X		Hedge Ratio
$	120	0.00 0.00 Correct
$	110	3.00 3.00 Incorrect
$	100	1.50 1.50 Incorrect
$	90	1.00 1.00 Correct

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

• Increases to a maximum of 1.0

OR

• Decreases to a minimum of 0 Incorrect

Answer 1

Payoff = Upward Price - Strike Price

Hedge ratio = Payoff / Diff between Upward and Downward price

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

Increases to a maximum of 1.0

Progressively more in the money means increase of payoff

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