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Determine the stock price tree, the call option tree, and the hedge ratio tree.

I have to make three separate trees for a european call option, I know what a stock price tree and a call option tree is but what information do I need to find to create a hedge ratio tree?

idknuttin
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1 Answers1

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The optimal hedge ratio when hedging options using stocks is defined as the ratio of option payoff change over the stock payoff change

BCLC
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    So it's basically the stock position? $\frac{\Delta C}{\Delta S}$ – idknuttin Mar 25 '16 at 23:23
  • @idknuttin what's stock position? it is the ratio you said – BCLC Mar 26 '16 at 00:06
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    Stock position is the ratio I stated, change in payoff over change in stock price. My textbook calls it stock position because it's the amount of stock the issuer of the call option should buy to make arbitrage – idknuttin Mar 26 '16 at 00:08