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A share of JMP stock sells for $65 and has a standard deviation of returns of 20 percent per year. The current risk free rate is 7% and a call option with a strike price of $60 expires in 3 months.
a) Using the Black-Scholes formula, what is the value of the call option?
b) If you found this option describe above selling for $1.50 less then what you calculated in part (a) above, would you want to buy it or sell it? Explain.
c) If you found a different option that had an exercise price of $55 and expired in 6 months, would you expect this option to have a higher or lower price than what you found in part (a). Explain without using any calculations.
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