Bull Spreads and Bear Spreads Two British pound (£) put options are available with exercise prices of $1.60 and $1.62. The premiums associated with these options are $.03 and $.04 per unit, respectively. (See Appendix B 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 following worksheet.

VALUE OF BRITISH POUND AT OPTION EXPIRATION

$1.55 $1.60 $1.62 $1.67 Put @ $1.60 Put @ $1.62 Net

c. At option expiration, the spot rate of the pound is

$1.60. What is the bull spreader’s total gain or loss?

d. At option expiration, the spot rate of the pound is

$1.58. What is the bear spreader’s total gain or loss?