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Choco Inc. buys chocolate from Switzerland and resells it in the U.S. It just purchased...

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Accounting

Choco Inc. buys chocolate from Switzerland and resells it in the U.S. It just purchased chocolate invoiced at SF50,000. Payment for the invoice is due in 30 days. Assume that the current exchange rate of the Swiss franc is $1.00. Also assume that three call options for the franc are available. The first option has a strike price of $1.00 and a premium of $.03; the second option has a strike price of $1.03 and a premium of $.01; the third option has a strike price of $1.06 and a premium of $.005. Choco Inc. expects a modest appreciation in the Swiss franc. a) (5 points) Describe how Choco Inc. could construct a bullspread using the first two options. What is the cost of this hedge? When is this hedge most effective? When is it least effective? b) (5 points) Describe how Choco Inc. could construct a bullspread using the first and the third options. What is the cost of this hedge? When is this hedge most effective? When is it least effective? c) (5 points) Given your answers to parts (a) and (b), what is the tradeoff involved in constructing a bullspread using call options with a higher exercise price?

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