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Finance Assignment | Professional Writing

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, uso = $110 (up state) and dSo = $71 (down state). a. What would be the call option hedge ratio for each of the following exercise prices:

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$110, $95, $90, $71, given the possible end-of-year stock prices, uso = $110 (up state) and dSo = $71 (down state)? (Round your answers to 3 decimal places.) Hedge Ratio Exercise Price 110 95 90 71 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 Decreases to a minimum of O

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