Question 3

Consider a bull spread strategy on two European put options on a given stock XYZ. One put option has a price of $30 and costs $2. The other put option has a strike price of $35 and costs $3.5.

a) Write down and comment on the payoff and profit tables of a bull spread on these two put options.

[5 marks]

b) Determine the maximum profit from the strategy and the future price(s) of stock XYZ at which this maximum profit is obtained.