Suppose that the result of a major lawsuit affecting Microsoft is due to be announced tomorrow. Microsoft's stock price is currently $60. If the ruling is favorable to Microsoft, the stock price is expected to jump to $75. If it is unfavorable, the stock is expected to jump to $50. What is the risk-neutral probability of a favorable ruling? Assume that the volatility of Microsoft's stock will be 25% for 6 months after the ruling if the ruling is favorable and 40% if it is unfavorable. Use DerivaGem to calculate the relationship between implied volatility and, strike price for 6-month European options on Microsoft today. Microsoft does not pay dividends. Assume that the 6-month risk-free rate is 6%. Consider call options with strike prices of 30, 40, 50, 60, 70, and 80.

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