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?