Suppose You Were Replicating a Two-Period Put Option in a Binomial

question 14

Multiple Choice

Suppose you were replicating a two-period put option in a binomial tree. Then, the replicating strategy involves an initial short position in the underlying stock that

• A) is held unchanged to maturity.
• B) is increased in size (i.e., becomes more short) after one period.
• C) is increased in size (i.e., becomes more short) if the price goes down in the first period and decreased in size (becomes less short) if the price goes up in the first period.
• D) is decreased in size (i.e., becomes less short) if the price goes down in the first period and increased in size (becomes more short) if the price goes up in the first period.

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Definitions:

Doubtful Debts

Monetary amounts owed to a company that are considered unlikely to be paid, often set aside as an allowance for doubtful accounts.

Inventory Balance

Indicates the amount or value of inventory on hand at any given point in time, factoring in additions, subtractions, and adjustments.

Raw Material

The basic substance in its natural, modified, or semi-processed state, used as an input to a production process for manufacturing.

Closing Inventory

The quantity and value of stock on hand at the end of an accounting period.