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The current price of a non-dividend paying stock is 40 and the continuously compounded risk-free...

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Accounting

The current price of a non-dividend paying stock is 40 and the continuously compounded risk-free rate of return is 8%. The following table shows call and put option premiums for three-month European options of various exercise prices. A trader is considering two investment strategies. The first is a long 40-strike call and long a 40-strike put. The second is long a 35-strike put and long a 45-strike call. Assume one option is on one share.
Call K=35
Call K=40
Call K=45 Put K=35
Put K=40
Put K=45
Premium 6.132.780.970.441.995.08
a) Please show the payoff and profit table and draw the diagram (payoff and profit) for both strategies. Assume ST is the stock price in 3-month.
b) Determine the range of stock prices in 3 months for which the second strategy outperforms the first strategy.

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