The price of a stock is $40. The price of a oneyear European put option on the stock with a strike price of $30 is quoted as $7 and the price of a oneyear 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.
a) Construct a payoff and profit/loss table
b) Draw a diagram illustrating how the investor’s payoff and profit or loss at expiation.
In the Quetion Actual Price of Stock after one year is not given. Assuming Actual Price of Stock after one year is $ 45.
(if you have the actual price you can change figures accordingly)
















$0  $0  $500  $500  

$0  $0  $0  $700  $700  

$300 
Note: at price of $45 call option and put option are out of money. Therefore buyer of options will not excercise options.
b) Diagram illustrating how the investor’s payoff and profit or loss at expiation.
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