Question: BMO Nesbitt believes that market volatility will be 20 percent
BMO Nesbitt believes that market volatility will be 20 percent annually for the next three years. Three- year at- the- money call and put options on the market index sell at an implied volatility of 22 percent. What options portfolio can BMO Nesbitt establish to speculate on its volatility belief without taking a bullish or bearish position on the market? Using BMO Nesbitt’s estimate of volatility, three- year at- the- money options have N (d1) =.6.
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