35 Bull spreads and bear spreads. Two dollar put options are available with exercise prices of £0.70 and £0.72. The premiums associated with these options are £0.02 and £0.03 per unit, respectively.

(See Appendix 5B in this chapter.)

a Describe how a bull spread can be constructed using these put options. What is the difference between using put options versus call options to construct a bull spread?
b Complete the worksheet.
c At option expiration, the spot rate of the pound is £0.70. What is the bull spreader’s total gain or loss?
d At option expiration, the spot rate of the pound is £0.66. What is the bear spreader’s total gain or loss?

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Value of US dollar at option expiration 0.65 Put@0.70 Put@0.72 Net 0.70 0.75 0.80