# Question

Suppose the stock price is $40 and the effective annual interest rate is 8%. Draw payoff and profit diagrams for the following options:

a. 35-strike put with a premium of $1.53.

b. 40-strike put with a premium of $3.26.

c. 45-strike put with a premium of $5.75.

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

a. 35-strike put with a premium of $1.53.

b. 40-strike put with a premium of $3.26.

c. 45-strike put with a premium of $5.75.

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

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