Plantronics owes Skr 50 million, due in one year, for electrical equipment it re
ID: 2758567 • Letter: P
Question
Plantronics owes Skr 50 million, due in one year, for electrical equipment it recently bought from ABB Asea Brown Boweri. The current spot rate is USD 0.1480/Skr, while the one-year forward rate is USD 0.1436/Skr. Plantronics is uncertain as to which hedging strategy it should select. The company has USD 10 million in a marketable USD CD yielding 7.00% per annum. At the same time, SE Bank of Stockholm offers 10.50% interest on one-year deposits. Both investments are considered risk free (ie. exhibiting zero default risk on part of the issuer).
In order for the two hedging strategies to yield an identical cost in USD, what must be the equilibrating spot-rate, all else being equal? State your answer rounded to four decimal points (e.g. 0.5678)!
Explanation / Answer
In order for the two hedging strategies to yield an identical cost in USD, 0.7825 must be the equilibrating spot-rate, all else being equal.