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

question 11

Multiple Choice

In a one-period binomial model,assume that the current stock price is $100,and that it will rise to $110 or fall to $90 after one month.If the risk-free rate is 0.1668% per month in simple terms,which of the following choices best describes the replicating portfolio for one hundred 99-strike one-month call options?

• A)Long 50 shares of stock and long 50 units of $1 bonds.
• B)Long 55 shares of stock and long 49 units of $1 bonds.
• C)Long 55 shares of stock and short 49 units of $1 bonds.
• D)Long 55 shares of stock and short 50 units of $1 bonds.

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Definitions:

Economic Inefficiency

A situation where resources are not allocated optimally, leading to waste or lost potential output.

Political Process

The set of activities associated with making decisions in groups or other forms of power relations between individuals, such as government policy-making.

Efficient Projects

Projects that are executed in such a manner that maximizes output or benefits with the least input or resources, often aligned with the goals of cost-effectiveness and sustainability.

Inefficient Projects

Projects that do not make the best use of resources, leading to wastage or less optimal outcomes.