In the binomial model,if an option has no chance of expiring out-of-the-money,the hedge ratio will be
A)0.5
B)infinite
C)1
D)0
E)none of the above

Question

Quizplus · Accepted Answer

The hedge ratio represents the ratio of shares to buy or sell in the underlying asset in order to hedge the option position. If an option has no chance of expiring out-of-the-money, it means that it will definitely be exercised, and the option holder will buy or sell the underlying asset at the pre-determined strike price. In this case, a hedge ratio of 1 would perfectly offset the option position with the underlying asset, resulting in a risk-free portfolio. Therefore, the correct choice is C) 1.

In the Binomial Model,if an Option Has No Chance of Expiring