In a One-Period Binomial Model, Assume That the Current Stock

question 20

Multiple Choice

In a one-period binomial model, assume that the current stock price is $100, and that it will rise to $110 or fall to $90 after one month. If the risk-free rate is 0.1668% per month in simple terms, which of the following choices best describes the replicating portfolio for one hundred 99-strike one-month call options?

• A) Long 50 shares of stock and long 50 units of $1 bonds.
• B) Long 55 shares of stock and long 49 units of $1 bonds.
• C) Long 55 shares of stock and short 49 units of $1 bonds.
• D) Long 55 shares of stock and short 50 units of $1 bonds.

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Definitions:

Business Units

Individual segments within a larger corporation that operate independently with their management team and financial objectives, often focusing on a specific product line or market.

Profit Centre

A branch or division of a company that is treated as a separate business, responsible for generating its own revenue and profits.

Performance Measure

Indicators used to evaluate the efficiency, effectiveness, and success of an organization's activities or employees' actions.

Return on Investment

A financial metric used to evaluate the efficiency of an investment, calculated as the net profit of the investment divided by its cost.