Evar Imports, Inc., buys chocolate from Switzerland and resells it in the United States. It just purchased chocolate invoiced at SF62,500. Payment for the invoice is due in 30 days. Assume that the current exchange rate of the Swiss franc is $0.74. Also assume that three call options for the franc are available. The first option has a strike price of $0.74 and a premium of $0.04; the second option has a strike price of $0.77 and a premium of $0.02; the third option has a strike price of $0.79 and a premium of $0.004. Evar Imports is concerned about a modest appreciation in the Swiss franc. Round your answers to the nearest dollar.

Describe how Evar Imports could construct a bull spread using the first two options. What is the cost of this hedge? When is this hedge most effective? When is it least effective?

Evar Imports Inc. would -Select-writebuyItem 1 the first option and -Select-writebuyItem 2 the second option.

It would pay $ .

The hedge is the most effective if the future spot rate of the franc is -Select-between the two exercise prices of $0.74 and $0.77greater than the higher exercise price of $0.77lower than the lower exercise price of $0.74Item 4 .

The hedge is the least effective when the future spot rate of the franc is -Select-between the two exercise prices of $0.74 and $0.77greater than the higher exercise price of $0.77lower than the lower exercise price of $0.74Item 5 .

Describe how Evar Imports could construct a bull spread using the first option and the third option. What is the cost of this hedge? When is this hedge most effective? When is it least effective?

Evar Imports Inc. would -Select-writebuyItem 6 the first option and -Select-writebuyItem 7 the third option.

It would pay $ .

The hedge is the most effective if the future spot rate of the franc is -Select-between the two exercise prices of $0.74 and $0.79greater than the higher exercise price of $0.79lower than the lower exercise price of $0.74Item 9 .

The hedge is the least effective when the future spot rate of the franc is -Select-between the two exercise prices of $0.74 and $0.79greater than the higher exercise price of $0.79lower than the lower exercise price of $0.74Item 10 .

Given your answers to parts (a) and (b), what is the trade-off involved in constructing a bull spread using call options with a higher exercise price?

Constructing a bull spread with a higher exercise price is -Select-morelessItem 11 expensive. The range in which the hedge is effective is -Select-narrowerwiderItem 12 and the opportunity costs are -Select-minimizedmaximizedItem 13 .