# Question

Suppose the stock price is $40 and the effective annual interest rate is 8%.

a. Draw on a single graph payoff and profit diagrams for the following options:

(i) 35-strike call with a premium of $9.12.

(ii) 40-strike call with a premium of $6.22.

(iii) 45-strike call with a premium of $4.08.

b. Consider your payoff diagram with all three options graphed together. Intuitively, why should the option premium decrease with the strike price?

a. Draw on a single graph payoff and profit diagrams for the following options:

(i) 35-strike call with a premium of $9.12.

(ii) 40-strike call with a premium of $6.22.

(iii) 45-strike call with a premium of $4.08.

b. Consider your payoff diagram with all three options graphed together. Intuitively, why should the option premium decrease with the strike price?

## Answer to relevant Questions

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