Use the Two-State Put Option Value in This Problem

question 81

Multiple Choice

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 _____ 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

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Definitions:

Utility

(Of a consumer) a measure of the satisfaction derived from consumption of goods and services.

Probability

The measurement of the likelihood of a specific event or outcome occurring.

Insurance Premium

The amount of money that an individual or business must pay for an insurance policy.

Financial Risk

The possibility of losing money on an investment or business venture.