Now extend the one-period binomial model to a two-period world.Answer questions 16 through 18.
-What is the hedge ratio if the stock goes down one period?
A)0.00
B)0.0725
C)1.00
D)0.73
E)none of the above

Question

Quizplus · Accepted Answer

The hedge ratio in a binomial model is calculated as the change in the option price divided by the change in the stock price. In a two-period model, if the stock goes down in one period, the hedge ratio is calculated based on the potential up and down movements in the next period. The given value of 0.0725 is the correct hedge ratio for this scenario.

Now Extend the One-Period Binomial Model to a Two-Period World