QUESTION TWO A speculator has written a call option on the shares of MNO Plc with an exercise price of K15.50 per share at a premium of K3.00. The speculator has also bought a call option on the shares of MNO Plc with an exercise price of K17.00 per share at a premium of K2.50. The following range of share prices is predicted: K13.50 K14.00 K16.50 K17.50 K18.00 K22.50 Required: A. Explain the meaning of the term spread in the option markets and distinguish between horizontal spreads and vertical spreads. [4 Marks] B. With the aid of a diagram, describe the type of option strategy that the speculator has adopted in the scenario above. [3 marks] C. Given the range of share price movements and taking into account the amounts of option premia, calculate the pay-off to the speculator [9 Marks] D. What conclusion would you make regarding the option strategy you identified above? [4 Marks] QUESTION TWO A speculator has written a call option on the shares of MNO Plc with an exercise price of K15.50 per share at a premium of K3.00. The speculator has also bought a call option on the shares of MNO Plc with an exercise price of K17.00 per share at a premium of K2.50. The following range of share prices is predicted: K13.50 K14.00 K16.50 K17.50 K18.00 K22.50 Required: A. Explain the meaning of the term spread in the option markets and distinguish between horizontal spreads and vertical spreads. [4 Marks] B. With the aid of a diagram, describe the type of option strategy that the speculator has adopted in the scenario above. [3 marks] C. Given the range of share price movements and taking into account the amounts of option premia, calculate the pay-off to the speculator [9 Marks] D. What conclusion would you make regarding the option strategy you identified above? [4 Marks]