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Consider the following three european call options all with

Consider the following three European call options, all with expiration at time T = 1: option A has strike $10; option B has strike $15; and option C has strike $20.

Suppose that the premium of the three options are $7, $3, $1 for A, B, and C, respectively, today (time 0). Suppose the price on the stock today is $14.

The the risk-free rate is 0%.

(a) Use put-call parity to compute the premiums of the corresponding European puts, A' , B' , C' .

(b) Graph the pay-off and profit functions for the straddle using call B and put B' .

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