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:

Fantasies

Imaginative thoughts, scenarios, or desires that are not based in reality, often serving as a mental escape or creative outlet.

Menopause

The cessation of menstruation and of the production of ova; it is usually a gradual process lasting up to several years.

Menstruation

A monthly process in which the lining of the uterus is shed, leading to bleeding through the vagina, part of the female reproductive cycle.

Ova

The female reproductive cells or eggs in animals and plants, capable of developing into a new organism upon fertilization.