A spread trading strategy involves taking a position in two or more options of the same type. A bull spread for instance can be created by buying a call option on a stock with a strike price of Kl and selling a call option on the same stock with the same expiration date and a higher strike price K2 (a) What is the payoff function of a bull spread? (3 marks) (b) What is the profit function of a bull spread? Draw a diagram. (6 marks) (c) Do you agree with the following statement: "A bull spread strategy limits the investor's upside as well as downside risk?" Explain. (5 marks) (d) As a bull spread, a bear spread can be created by buying a call with one strike price K and selling a call with another strike price K2, but in this case K, >K,. Repeat (a) and (b) for this spread and evaluates the following statement "An investor who enters into a bull spread is hoping that the stock price will increase. By contrast, an investor who enters into a bear spread is hoping that the stock price will decline". (10 marks) An investor would like to buy a portfolio consisting of 2 bull spreads and one bear spread. The calls composing the bull spread have prices equal to Cbull = 7.9, Cbull2 = 3.6 and strike prices Kbull = 150, Kbull2 = 200 whereas the prices and strike prices of the bear spread amount to Cbearl = 6.27, C bear2 = 6.51, K bearl = 190 and K = 165 respectively. Make a plot of the profit function of the investor by using any suitable graph sheet and compare it with the profit resulting of an investment of the same amount but in a call option with a strike price K call = 192. Assume that the interest rate is 4% and the maturity date of the call options 1 year. (10 marks) e) bear2 A spread trading strategy involves taking a position in two or more options of the same type. A bull spread for instance can be created by buying a call option on a stock with a strike price of Kl and selling a call option on the same stock with the same expiration date and a higher strike price K2 (a) What is the payoff function of a bull spread? (3 marks) (b) What is the profit function of a bull spread? Draw a diagram. (6 marks) (c) Do you agree with the following statement: "A bull spread strategy limits the investor's upside as well as downside risk?" Explain. (5 marks) (d) As a bull spread, a bear spread can be created by buying a call with one strike price K and selling a call with another strike price K2, but in this case K, >K,. Repeat (a) and (b) for this spread and evaluates the following statement "An investor who enters into a bull spread is hoping that the stock price will increase. By contrast, an investor who enters into a bear spread is hoping that the stock price will decline". (10 marks) An investor would like to buy a portfolio consisting of 2 bull spreads and one bear spread. The calls composing the bull spread have prices equal to Cbull = 7.9, Cbull2 = 3.6 and strike prices Kbull = 150, Kbull2 = 200 whereas the prices and strike prices of the bear spread amount to Cbearl = 6.27, C bear2 = 6.51, K bearl = 190 and K = 165 respectively. Make a plot of the profit function of the investor by using any suitable graph sheet and compare it with the profit resulting of an investment of the same amount but in a call option with a strike price K call = 192. Assume that the interest rate is 4% and the maturity date of the call options 1 year. (10 marks) e) bear2