Create a delta-neutral portfolio

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Reference no: EM133109527

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. Theannualized 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?

Reference no: EM133109527

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