When the Returns of an Option and Stock Are Perfectly

question 75

Multiple Choice

When the returns of an option and stock are perfectly correlated as in a two-state binomial option model, the hedge ratio must be equal to the ratio of ________.

• A) the range of the option outcomes to the range of the stock outcomes
• B) the range of the stock outcomes to the range of the option outcomes
• C) the standard deviation of the option returns to the standard deviation of the stock returns
• D) the standard deviation of the stock returns to the standard deviation of the option returns

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Definitions:

Industry Supply Curve

A graphical representation showing the total quantity of a good that producers in an industry are willing to supply at various prices.

Individual Supply Curves

Graphical representations that show the relationship between the price of a good and the quantity of the good that a single producer is willing to supply.

Short-run

A period of time in which at least one input is fixed and cannot be changed, affecting the capacity to adjust production levels.

Long-run Equilibrium

A state in which all factors of production and inputs can be fully adjusted, and there are no fixed variables, resulting in market supply equalling market demand.