Goldman Sachs believes that market volatility will be 20% annually for the next three years. Three-year at-the-money
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Goldman Sachs believes that market volatility will be 20% 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%. What options portfolio can Goldman establish to speculate on its volatility belief without taking a bullish or bearish position on the market? Using Goldman’s estimate of volatility, 3-year at-the-money options have N(d1) = .6.
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