Use the two-state put-option value in this problem. S_O = $100; X = $120; the two possibilities for S_T are $150 and $80. The range of P across the two states is _____, and the hedge ratio is _______. A) $0 and $40; −4/7 B) $0 and $50; +4/7 C) $0 and $40; +4/7 D) $0 and $50; −4/7 E) $20 and $40; +1/2

Question

Quizplus · Accepted Answer

The range of the put option value (P) is $0 when the stock price is $150 (since the option is out of the money) and $40 when the stock price is $80 (since the option is in the money and worth $120 - $80). The hedge ratio is calculated as the change in the option value divided by the change in the stock price, which is (0 - 40) / (150 - 80) = -4/7.

Use the Two-State Put-Option Value in This Problem