A stock is currently selling for $40 per share. A 3-month call with an exercise price of $40 has a premium of $4 and a 3-month put with the same exercise price has a premium of $3.

1. Describe what is necessary to be done with these options in order to create a straddle.
2. Find the breakeven stock price(s) for this position.
3. Compute the maximum gain and maximum loss on this po-sition.
4. Draw the profit-loss diagram for this position labelling all relevant points.