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?