[1](Whole question is in attached image) (Creation of payoffs using options) Consider the following three call options on a non-dividend-paying stock expiring in T:

Strike

Premium

K1=$17/share

$5.00/share

K2=$20/share

$3.00/share

K3=$23/share

$2.00/share

Assume that one option contract corresponds to 100 shares of stock.

You want to create the following payoff:

If S(T)

If S(T)>K3, payoff (time 0 cash flow + time T cash flow) = +$100.

In other words, you want to receive a fixed payoff of +$100 if S(T) is sufficiently away from K2. (Following usual conventions, the time-value of money is ignored in the payoff calculation.)

How will you create such payoff by trading the call options given in the above? Explain your strategy by drawing a payoff diagram.