In the problems following, use an equity risk premium of 5.5 percent if none is specified.

1. The following are prices of options traded on Microsoft Corporation, which ays no dividends Call Put One-month Three-month Six-month K=85 K=90 $2.75 $1.00 $4.00 $2.75 $7.75 $6.00 K=85 K=90 $4.50 $ 7.50 $5.75 9.00 $8.00 $12.00 The stock is trading at $83, and the annualized riskless rate is 3.8%. The stan- dard deviation in ln(stock prices) (based on 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 repli- cate 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 $85