In a one-period binomial model,assume that the current stock price is $100,and that it will rise to $110 or fall to $90 after one month.If an investment of a dollar at the risk-free rate returns $1.001668 after one month,how many 100-strike one-month call options and how many units of the stock will be needed to be combined to obtain a riskless $1 portfolio?
A)Long 0.02 calls and long 0.01 shares.
B)Long 0.01 calls and long 0.02 shares.
C)Short 0.01 calls and short 0.02 shares.
D)Short 0.02 calls and long 0.01 shares.

Question

Quizplus · Accepted Answer

To create a riskless portfolio, we need to find the hedge ratio (delta) which is (110-100)/(110-90) = 0.5. This means we need 0.5 shares for each call option. To achieve a riskless $1 portfolio, we need to short 0.02 calls and long 0.01 shares, as this combination will offset the risk of the call option with the stock movement.

In a One-Period Binomial Model,assume That the Current Stock Price