Q5

Two European put options on a stock have the same expiration date and strike prices of $50 and $60, with option prices $5 and $8, respectively. The current stock price 5o is $70. a) Explain how a bear spread can be constructed using the two put options. (2 marks) b) For what range of terminal stock prices St would the bear spread lead to a profit? For what range of terminal stock prices St would the bear spread lead to a loss? (2 marks) c) Are the two put options at-the-money, out-of-the-money or in-the-money? (1 mark)