Question: a. Consider a call option. If, in a two-state model, a stock can take a price of $300 or $200, what would be the hedge

a. Consider a call option. If, in a two-state model, a stock can take a price of $300 or $200, what would be the hedge ratio for each of the following exercise prices: $280, $270, $240, $200?

b.What do you conclude about the hedge ratio as the optionstrike pricebecomes progressivelyhigher?

- Increases to a maximum of 1.0

- Decreases to a minimum of 1.0

- Increases to a maximum of 0

- Decreases to a minimum of 0

- Increases to a maximum of -1.0

- Decreases to a minimum of -1.0

c.Consider aPUToption. If, in a two-state model, a stock can take a price of $300 or $200, what would be the hedge ratio for each of the following exercise prices: $280, $270, $240, $200?

d.What do you conclude about the hedge ratio as the option strike price becomes progressively morein the money?

- Increases to a maximum of 1.0

- Decreases to a minimum of 1.0

- Increases to a maximum of 0

- Decreases to a minimum of 0

- Increases to a maximum of -1.0

- Decreases to a minimum of -1.0

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