- Suppose there is a call option on Microsoft (MSFT) stock. The option has a strike price of $200. At the same time, a US Treasury Bill with the same maturity date has an annualized return of 4.00%. For simplicity, you can assume that there are exactly 7 months (or 210 days) to the maturity of the option.

a) Assuming that the correct standard deviation to use in the Black-Scholes formula is 30% annually, calculate the price of the call option described above assuming that the option has a European exercise structure. The price of the MSFT stock is $234.00 at the time the option was quoted.

b) Suppose that you believe the historical annual standard deviation of MSFT stock, 25%, should be used as the volatility variable in the formula when calculating the Black-Scholes price. What will be the price of the same option under this new volatility measure?

c) Calculate the price of a put option that has the same strike price and maturity as the call option above. Use the historical standard deviation in your calculation.