The Single Period Binomial Hedge Ratio for Stock Call Options

question 21

True/False

The single period binomial hedge ratio for stock call options could be computed by equating the two future cash flows -- from a portfolio of long h shares of stock and short one call -- and solve for the number of underlying stocks to hold.

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Definitions:

Financial Asset

Any asset that is cash, an equity instrument of another entity, a contractual right to receive cash or another financial asset, or a contractual right to exchange financial instruments on potentially favorable terms.

Residual Ownership

The remaining interest or value that shareholders have in a company after all obligations and liabilities have been satisfied.

Legal Claims

Rights to seek redress or enforcement through legal action.

Preferred Stock

A type of equity security that has priority over common stock in the distribution of dividends and upon liquidation.