Problem: The price of a stock is $40. The price of a one-year European put option on the stock with a strike price of $30 is quoted as $7 and the price of a one-year European call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options.
Required:
Question 1: Construct a payoff and profit/loss table
Question 2: Draw a diagram illustrating how the investor's payoff and profit or loss at expiation.