Question

DantheDog

Consider the situation in which stock price movements during the life of a European option are governed by a two-step binomial tree. Explain why it is not possible to set up a position in the stock and the option that remains riskless for the whole of the life of the option.

Answer 1

alalala

The riskless portfolio consists of a short position in the option and a long position in shares. Because changes during the life of the option, this riskless portfolio must also change.