B$.$ A put option on British pounds $()$ exists with a strike price of $$1\mathrm{.}60$ and a premium of

$$\mathrm{.}03$ per unit. Another put option on British pounds has a strike price of $$1\mathrm{.}62$ and a

premium of $$\mathrm{.}04$ per unit.

Required:

i$)$ Describe how a bullspread can be constructed using these options, and explain

the difference between using put options versus call options to construct a

bullspread.

$(4$ marks$)$

ii$)$ Compute the payoff on this bullspread at $$1\mathrm{.}55$ and $$1\mathrm{.}67.$

$(4$ marks$)$

iii$)$ If the British pound spot rate is $$1\mathrm{.}60$ at option expiration, compute the total

profit or loss for a bearspread.

$(3$ marks$)$

iv$)$ Construct a contingency graph for the above bearspread

$(4$ marks$)$