Consider the MSFT option prices below (prices at closing on April 29, 2022).

• Microsoft current stock price is $278
• Assume no dividends
• Expiry of options October 21, 2022 (assume 172 days to expiration)

Calls (EXPIRATION: 12/20/2020) PUTS (EXPIRATION 12/20/2020)

Strike	Price	Intrinsic value	Implied Variance		Strike	Price	Intrinsic Value	Implied Variance
270	$36.00				270	$20.80
300	$15.25				300	$35.70

1. Identify the above options as in-the-money and out-of-the-money.
2. Why are the intrinsic values different from the market prices?
3. What is the average implied variance of annual returns of MSFT shares in the above options?
4. Use the annual risk-free rate from the YTM of the 10-year bond and the call prices above to find the prices of Put options using the Put-Call Parity model. How do these prices compare to the market prices of the Puts? Are there any arbitrage opportunities?

For Risk-free rate Rf in this exam, use the Yield (using the asked price) of the following T-bond (price below as of April 29, 2022: maturity Coupon Bid Price Asked Price Yield to Maturity 2/15/2031 1.875 91.14 91.15 Assume that market risk premium (Rm Rf) = 6% 152.0660 For Risk-free rate Rf in this exam, use the Yield (using the asked price) of the following T-bond (price below as of April 29, 2022: maturity Coupon Bid Price Asked Price Yield to Maturity 2/15/2031 1.875 91.14 91.15 Assume that market risk premium (Rm Rf) = 6% 152.0660