When the returns of an option and stock are perfectly correlated as in a two state binomial option model,the hedge ratio must be equal to ____________.
A) the ratio of the range of the option outcomes to the range of the stock outcomes
B) the ratio of the range of the stock outcomes to the range of the option outcomes
C) the ratio of the standard deviation of the option returns to the standard deviation of the stock returns
D) the ratio of the standard deviation of the stock returns to the standard deviation of the option returns

Question

Quizplus · Accepted Answer

The hedge ratio, also known as the option's delta, is calculated as the ratio of the range of the option outcomes to the range of the stock outcomes in a binomial model.

When the Returns of an Option and Stock Are Perfectly