9. If you use a bull currency spread, your largest profit would be fixed at Firs

Question

9. If you use a bull currency spread, your largest profit would be fixed at First option premium $0.019 Second option premium-$0.015 First option strike price $0.64 Second option strike price = $0.65 a) S0.004 b) S0.005 c) $0.006 d) $0.007 SOLUTION: Buy the call with lowerX Sell the call with higher X Net S.600 $.640 $.645 $.650 $.700 014 015 .001 019 015 004 019 015 004 009 015 006 041 035 006 Pick a spot price higher than both strike prices ($.64 and $.65), e.g. $.70. Then, calculate profit for two positions. Your answer will be always $0.006

Explanation / Answer

In case of bull call spead ,you will buy most in the money or at the money call option (option will lowest strike price) and sell one out of the money option.

since $.64 is lowest price ,we will buythis option so premium paid = -.019

since .65 is next exercisable option ,we will sell this option ,so premium received on sell = .015

Net premium paid = -.019+.015 =- .004

So in this maximum profit is restricted to

Maximum profit = strike price of sold option (short) -Strike price of long option (buy) -net premium paid

                = .65-.64-.004

                = $ .006

So the maximum profit in bull call spread is restricted to .006 in case whatever the highest price be in future.

say if in future the price turns out to be .80

option 1 (buy with strike price of .64) option 2 (Sell with strike price of .65) Option exerciable or not yes   [since lower than .80] yes [since elower than .80] Payoff .80-.64 = .16 [profit since you paid only .64 for the option worth .80] .65-.80= -.15   [loss since you paid .80 to purchase and sella t .65 to the buyer of call option)-[remember you write this option that is sell] net profit = .16-.15-.004 premium = .006

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