(b) The price of a stock is $40. The price of one-year European put option on the stock with a strike price of $30 is quoted at $7 and the price of a European call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 10 shares, shorts 10 call options and buys 10 put options.

(i) Construct a table and draw a diagram illustrating how the investors profit or loss varies with the stock price over the next. What are the maximum gain, maximum loss, and break even point from this trade? [20%]

(ii) How does your answer change if the investor buys 10 shares, shorts 20 call options and buys 20 put options? Why would an investor want to enter into this trade? [20%]