What is the low-cost hedging alternative for Plantronics? What is the cost?
Solution. Plantronics can use the forward market to lock in a cost for its payable of $7.18 million. Alternatively, Plantronics can use a money market hedge to lock in a lower dollar cost of $7,165,611 for its payable. Thus, the money market hedge is the low-cost hedge. To compute this cost, note that Plantronics must invest SKr 45,248,869 today at 10.5% to have SKr 50 million in one year (45,248,869 × 0.105 = 50 million). This amount is equivalent to $6,696,833 at the current spot of SKr $0.1480/SKr. The opportunity cost to Plantronics of taking this amount from its CD today and converting it into SKr is $7,165,611, which is the future value of $6,696,833 invested at 7%.