Assuming that Allied-Lyons was relying on a straddle strategy (refer to box 3.2 for background information), explain graphically and numerically under what conditions Allied-Lyons could have generated speculative gains. For illustrative purposes assume that on January 15, 1991, Allied-Lyons had written sterling calls and puts with an identical strike price of $1.25 = £1 and respective premia of cents 2.70 and 3.13 per pound. Was Allied-Lyons bullish or bearish on the dollar? If the dollar were to rebound to 1.50 by March 1, how and when should Allied-Lyons hedge its otherwise speculative position? How would your answer differ if the straddle used American rather than European options?