In a one-period binomial model,assume that the current stock price is $100,and that it will rise to $115 or fall to $80 after three months.If risk-free investment has a gross return of 1.005 per three month time-step,what is the best replicating portfolio of one hundred 101-strike three-month put options from the following options?
A)Short 60 shares of stock and long 69 units of $1 bonds.
B)Short 65 shares of stock and long 70 units of $1 bonds.
C)Short 65 shares of stock and short 69 units of $1 bonds.
D)Short 65 shares of stock and short 70 units of $1 bonds.

Question

Quizplus · Accepted Answer

The correct answer is A because it is the only portfolio that has the same payoff as the put option in both states of the world.

In a One-Period Binomial Model,assume That the Current Stock Price