- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 38. Valuation of Contingent Claims
- Subject 1. One-Period Binomial Model

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**CFA Practice Question**

Which statement is false regarding the one-period binomial model?

B. The hedge ratio is positive for call and put options.

C. The discount rate used in the one-period binomial model is not risk-adjusted.

A. A call option can be synthetically replicated with the underlying and financing.

B. The hedge ratio is positive for call and put options.

C. The discount rate used in the one-period binomial model is not risk-adjusted.

Correct Answer: B

Statement A is true. The call option is equivalent to a leveraged position in the underlying.

Statement B is false. It is negative for a put option. To hedge a long put position, the arbitrageur will short sell the underlying and lend a portion of the proceeds.

Statement C is true. It is simply the risk-free interest rate.

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