In a Two-Period Binomial World,a Mispriced Call Will Lead to an Arbitrage

question 12

Multiple Choice

In a two-period binomial world,a mispriced call will lead to an arbitrage profit if

• A)the proper hedge ratio is maintained over the two periods
• B)the hedge portfolio is terminated after one period
• C)the option goes from over- to underpriced or vice versa
• D)the option remains mispriced over both periods
• E)none of the above

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Definitions:

Trade Flows

The movement of goods and services between countries, often measured in terms of imports and exports.

Factor Endowments

The quantity and quality of labor, land, and natural resources of a country.

Acquired Comparative Advantage

A concept where a country becomes more proficient and competitive in producing goods or services not because of natural factors but through practice and technological advancement.

Subsidy

A form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policies.