Enter a T or F. Explain your choice.

1. The replicating portfolio for a long European call option always involves a long position in the stock and borrowing from the risk-free asset.

2. As the stock price increases, the value of a European put option increases, all else equal.

3, The Black-Scholes price of a European option depends on the mean rate of return on the underlying stock.

4. You have sold a European put option and are hedging it by managing a replicating portfolio. If the stock price goes up, then you should change your stock holdings in the replicating portfolio by buying some stock.

Portfolio A is long 100 European call options on a stock whose strike price is equal to the current stock price.

Portfolio B is the replicating portfolio for portfolio A and contains 50 shares of stock and a position in the

risk-free asset.

5. If the stock price increases, the value of portfolio A decreases

6. If the stock price increases, portfolio B will need to sell some stock in order to maintain its status as the replicating portfolio for portfolio A.