The price of a stock is $40. The price of a one-year European put option on the stock with a strike price of $30 is $7 and the price of a one-year European call option on the stock with a strike price of $50 is $5.

a) Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options. Draw a diagram (to scale) illustrating how the investors profit or loss varies with the final stock price ($0 - $100).

b) Clearly show the Profit / Loss using different graphs for each of the securities (calls, stock, puts, and overall payoff)

c) Compute the breakeven point(s) and label these on the graph.