a) You have information that makes you believe that volatility will be particularly high over the next 3 months. Describe one option spread that could be used to take advantage of your knowledge. Be sure to include which derivate contracts to use, what the spread is called, the maturity of the contracts and the relationship of K to S.

b) Outline the theoretical circumstances under which you would profit from this strategy. Outline the maximum theoretical profits that could be made.

(2 marks)

c) Outline the theoretical circumstances under which you would make losses from this strategy. Outline the maximum theoretical losses that could be made.

d) Discuss two circumstances under which you might expect volatility to be higher than what the market is expecting over the coming year.