Plantronics, a US company, owes SKr 50 million, due in one year, for some electrical equipment it recently bought from ABB Asea Brown Boveri in Sweden. At the current spot rate of $0.1480/SKr, this payable is $7.4 million. It wishes to hedge this payable but is undecided how to do it. The one-year forward rate is currently $0.1436. Plantronics' treasurer notes that the company has $10 million in a marketable U.S. dollar CD yielding 7% per annum. At the same time, SE Banken in Stockholm is offering a one-year time deposit rate of 10.5%.

Required

What are the costs of each hedging alternative (forward vs. money market ) for Plantronics? Which is preferred?

(ii) Determine the break even exchange rate between the two hedging strategies,

Cosmo, a Japanese exporter, wishes to hedge its $15 million in dollar receivables coming due in 60 days. In order to reduce its net cost of hedging to zero, however, Cosmo sells a 60-day dollar call option for $15 million with a strike price of 98/$ and uses the premium of $314,000 to buy a 60-day $15 million put option at a strike price of 90/$.

Required

Show graphically Cosmos currency collar hedge position over the range 80/$-110/$. What risk is Cosmo subjecting itself to with this option hedge?

What is the net yen value of Cosmo's option hedged position at the following future spot rates: 85/$, 95/$, and 105/$?