To create a delta-neutral portfolio, the SIT fund has sold 10,000 at-the-money (ATM) put options on Epsilon stock with when the shares were trading at $100. The risk manager from SIT uses the Black-Scholes model to value all option exposures. The current price of the shares is $90. The annualized standard deviation of Epsilon stock returns is 40% and the option expires in six months. If the risk-free rate is 2%, approximately, what is the likelihood that this option will be exercised? 26 (a) 0.6839 (b) 0.7975 (c) 0.3161 (d) 0.2025
To create a delta-neutral portfolio, the SIT fund has sold 10,000 at-the-money (ATM) put options on Epsilon stock with when the shares were trading at $100. The risk manager from SIT uses the Black-Scholes model to value all option exposures. The current price of the shares is $90. The annualized standard deviation of Epsilon stock returns is 40% and the option expires in six months. If the risk-free rate is 2%, approximately, what is the likelihood that this option will be exercised? 26 (a) 0.6839 (b) 0.7975 (c) 0.3161 (d) 0.2025
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 25P
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![26. To create a delta-neutral portfolio, the SIT fund has sold 10,000 at-the-money (ATM) put options
on Epsilon stock with when the shares were trading at $100. The risk manager from SIT uses
the Black-Scholes model to value all option exposures. The current price of the shares is $90. The
annualized standard deviation of Epsilon stock returns is 40% and the option expires in six months.
If the risk-free rate is 2%, approximately, what is the likelihood that this option will be exercised?
26
(a) 0.6839
(b) 0.7975
(c) 0.3161
(d) 0.2025](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff2ab050a-d13e-4a73-9fee-dc44d5d071e8%2Fec2d4919-6e95-4ded-9803-32e9d35a592d%2Flw58l2_processed.png&w=3840&q=75)
Transcribed Image Text:26. To create a delta-neutral portfolio, the SIT fund has sold 10,000 at-the-money (ATM) put options
on Epsilon stock with when the shares were trading at $100. The risk manager from SIT uses
the Black-Scholes model to value all option exposures. The current price of the shares is $90. The
annualized standard deviation of Epsilon stock returns is 40% and the option expires in six months.
If the risk-free rate is 2%, approximately, what is the likelihood that this option will be exercised?
26
(a) 0.6839
(b) 0.7975
(c) 0.3161
(d) 0.2025
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