Currency Bull Spreads and Bear Spreads A call option on British pounds (£) exists with a strike price of $1.56 and a premium of $.08 per unit. Another call option on British pounds has a strike price of $1.59 and a premium of $.06 per unit. (See Appendix B in this chapter.)

a. Complete the worksheet for a bull spread below.

VALUE OF BRITISH POUND AT OPTION EXPIRATION

$1.50 $1.56 $1.59 $1.65 Call @ $1.56 Call @ $1.59 Net

b. What is the break-even point for this bull spread?

c. What is the maximum profit of this bull spread?

What is the maximum loss?

d. If the British pound spot rate is $1.58 at option expiration, what is the total profit or loss for the bull spread?

e. If the British pound spot rate is $1.55 at option expiration, what is the total profit or loss for a bear spread?