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    Option Pricing

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    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 the stock prices (based upon historical data) is 30%.

    a. From the options above, identify those that are "in the money" and those that are "out of the money."
    b. Explain why the 1-month call option with a strike price of $90 has value.
    c. Explain why the 3-month and 6-month options have prices or premiums that are higher than those for the 1-month options.
    d. Estimate the value of a three-month call, with a strike price of $85.
    e. Using put-call parity, estimate the value of a three-month put with a strike price of $85.

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    Solution Summary

    This solution discusses option pricing.