Question Details

Two British pound (₤) put options are available with exercise


1. Bullspreads and Bearspreads. Two British pound (₤) put options are available with exercise
prices of $1.60 and $1.62. The premiums associated with these options are $.03 and $.04 per unit,
respectively. (See Appendix B in this chapter.)
a. Describe how a bullspread can be constructed using these put options. What is the difference
between using put options versus call options to construct a bullspread?
b. Complete the following worksheet.
Value of British Pound at Option Expiration
$1.55 $1.60 $1.62 $1.67
Put @ $1.60
Put @ $1.62
Net
a. At option expiration, the spot rate of the pound is $1.60. What is the bullspreader- total gain
or loss?
b. At option expiration, the spot rate of the pound is $1.58. What is the bearspreader- total gain
or loss?


2. Currency Option Contingency Graphs. (See Appendix B in this chapter.) The current spot rate
of the Singapore dollar (S$) is $.50. The following option information is available:
• Call option premium on Singapore dollar (S$) = $.015
• Put option premium on Singapore dollar (S$) = $.009
• Call and put option strike price = $.55
• One option contract represents S$70,000
Construct a contingency graph for a short straddle using these options.




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