The stock of Klaatu Inc. is currently trading at S0 dollars per share. Assuming K1 < K2 <

K3 < K4 < K5, consider a portfolio of European put and call options which pay the following on

expiration in 6 months:

Stock Price (S6) Portfolio Payo S6 < K1 3(K1 S6) K1 S6 K2 0 K2 < S6 K3 K2 S6 K3 < S6 K4 S6 K4 K4 < S6 K5 0 K5 < S6 3(K5 S6)

In addition, make the following assumptions:

K3 = 1 2(K2 + K4) 6-month European calls and puts are available with strike prices K1 and K5 only 6-month European puts are available with strike prices K2, K3, and K4, S0 = Present value of K5.

(a) (5 points) Construct a nal payo diagram for this strategy.

(b) (5 points) Identify the relevant options needed to do portfolio. Indicate the position

taken in each option