The following are prices of options traded on Microsoft Corporation, which pays no dividends.
| Call Don't use plagiarized sources. Get Your Custom Essay on the following are prices of options traded on microsoft corporation which pays no di 546210 For $10/Page 0nly | Put | |
| K=85 K=90 | K=85 K=90 | |
| 1 month | 2.75 1.00 | 4.50 7.50 |
| 3 month | 4.00 2.75 | 5.75 9.00 |
| 6 month | 7.75 6.00 | 8.00 12.00 |
The stock is trading at $83, and the annualized riskless rate is 3.8%. The standard deviation in In stock prices (based upon historical data) is 30%.
a. Estimate the value of a three-month call, with a strike price of 85.
b. Using the inputs from the Black-Scholes model, specify how you would replicate this call.
c. What is the implied standard deviation in this call?
d. Assume now that you buy a call with a strike price of 85 and sell a call with a strike price of 90. Draw the payoff diagram on this position.
e. Using put-call parity, estimate the value of a three-month put with a strike price of
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