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:

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