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:

Retrieval Failure

An inability to recall information that is stored in memory, often due to interference or decay over time.

Decay Theory

A psychological theory proposing that memory fades and is lost over time if not used or revisited.

Interference

Interference in psychology refers to the phenomenon where memories or information can be distorted or lost because of the competition with other information.

Shallow Level Of Processing

A cognitive processing method that involves minimal attention to meaning, focusing instead on physical features like the appearance of words.