An oil company decides to issue a contract that has a payout after one year and after two years.

After one year the investor gets the dollar value of the stock price at year one, provided the stock trades between a lower bound of 20 and an upper bound of 30.

If it is below the lower bound, the investor gets the lower bound; If it is above the upper bound the investor gets the upper bound. The payout in year 2 has the same format.

The prices of the stock and several European call and put options are shown below.

S(0) = 25; riskless rate = 5%, continuously compounded. The stock pays no dividends.

	Strike	1 year	2years
	20	6.35	7.63
	25	3.08	4.66
calls	30		2.68
	35	0.45
	40	0.15
	20	0.38	0.73
	25	1.86	2.28
puts	30	4.79
	35	8.74
	40		12.00

1. Draw the payout diagram of cash flows that occur at year 1.
2. Repeat the diagram for cash flows that occur at year 2.
3. Establish the value of the position at date 0. You can use put call parity to compute certain missing option values if you want. Show all your calculations step by step.