Suppose the stock price is $40 and the eective annual interest rate is 8%. Draw payoff and protit diagrams for the following options:

(a) 35-strike put with a premium of $1.53.

(b) 40-strike put with a premium of $3.26.

(c) 45-strike put with a premium of $5.75.

Consider your payoff diagram with all three options graphed together. Intuitively,

why should the option premium increase with the strike price?