Currency bull spreads and bear spreads. A call option on dollars exists with a strike price of £0.64 and a premium of £0.04 per unit. Another call option on dollars has a strike price of £0.66 and a premium of £0.03 per unit. (See Appendix 5B in this chapter.)
a Complete the worksheet for a bull spread below.
b What is the breakeven point for this bull spread?
c What is the maximum profit of this bull spread? What is the maximum loss?
d If the dollar spot rate is £0.65 at option expiration, what is the total profit or loss for the bull spread?
e If the dollar spot rate is £0.63 at option expiration, what is the total profit or loss for a bear spread?