Mr. Wong is evaluating the execution of a “bear spread” on the British pound using put...

Mr. Wong is evaluating the execution of a “bear spread” on the British pound using put options. He is given the following information regarding the dollar-pound exchange rates. September Put option with an exercise price of $2 per £ is trading at a premium of $0.03 and another September put option with an exercise price of $2.10 is trading at a put premium of $0.06.

I. How would you determine your profit or loss on the bear spread?

II. What is the maximum amount the trader can make on the bear spread in the event of pound depreciation against the dollar?

III. What is the net cost of the bear spread?

IV. Determine the profit or loss on the bear spread if spot exchange rate (price at maturity) at maturity is a. $1.90 per pound b. $2.15 per pound c. $2.01 per pound

V. Determine the breakeven point in this bear spread.

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jeff jeffy answered 7 months ago

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