Problem:
The current price of a stock is $60. The price of a one-year European put option on the stock with a strike price of $45 is quoted as $7 and the price of a one-year European call option on the stock with a strike price of $75 is quoted as $5.
Required:
Question 1: Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options. Draw a combined profit diagram for this portfolio illustrating how the investor's profit or loss varies with the stock price at the end of one-year.
Question 2: Another investor sells 200 call options and buys 200 put options. Draw a combined profit diagram for this portfolio illustrating how the investor's profit or loss varies with the stock price at the end of one-year.
Note: Please show how you came up with the solution.