A replicating portfolio for a call option includes .75 share of stock. The hedge ratio states that for each $1 decline in the stock price, the price of the call should
A) decline by $.75.
B) rise by $1.
C) decline by S.25.
D) rise by $.25.

Question

Quizplus · Accepted Answer

The hedge ratio, also known as the delta, indicates the amount the price of the option is expected to move based on a $1 move in the underlying stock. Since the replicating portfolio includes .75 share of stock for a call option, for each $1 decline in the stock price, the price of the call should decline by $.75, reflecting the direct relationship between the stock and the call option's price movements.

A Replicating Portfolio for a Call Option Includes