Question: 3 . ( 2 5 pts . total ) Suppose a stock s price is $ 4 0 and the effective annual interest rate is

3.(25 pts. total) Suppose a stocks price is $40 and the effective annual interest rate is 8%. Draw on a single graph the payoff and profit diagrams for the following options:
a.(5 pts.) $35-strike call with a premium of $9.12.
b.(5 pts.) $40-strike call with a premium of $6.22.
c.(5 pts.) $45-strike call with a premium of $4.08.
d.(10 pts.) Consider your payoff diagram with all three options graphed together. Intuitively, why should the option premium decrease with the strike price?

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