2. Payoff Diagrams The stock of Klaatu Inc. is currently trading at S0 dollars per share. Assuming K1 < K2 < K3 < K4 < K5, consider a portfolio of European put and call options which pay the following on expiration in 6 months:

Stock Price (S6)	Portfolio Payoff
S6 < K1	3(K1 S6)
K1 S6 K2	0
K2	K2 S6
K3	S6 K4
K4 S6 K5	0
K5 < S6	3(K5 S6)

In addition, make the following assumptions:

K3 = 1 (K2 + K4), 2

1

6 month European calls and puts are available with strike prices K1 and K5, only 6 month European puts are available with strike prices K2, K3, and K4, S0 = Present value of K5.

Answer the following:

1. (a) Construct a final payoff diagram for this strategy.
2. (b) Identify the relevant options needed to create this portfolio. Indicate the position taken in each option.