The following are prices of options traded on Microsoft Corporation, which pays no dividends.
|
Call |
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