Reconsider the determination of the hedge ratio in the two-state model where we showed that one-third share of stock would hedge one option. The possible end-of-year stock prices, uS0 = $90 (up state) and dS0 = $54 (down state).
a. What would be the call option hedge ratio for each of the following exercise prices: $90, $71, $63, $54, given the possible end-of-year stock prices, uS0 = $90 (up state) and dS0 = $54 (down state)? (Round your answers to 3 decimal places.)
b. What do you conclude about the hedge ratio as the option becomes progressively more in the money?
multiple choice
Increases to a maximum of 1.0
Decreases to a minimum of 0