IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥300 million payable in 6 months. Currently, the spot exchange rate is ¥110/$ and the six-month forward rate is ¥100/$. The six-month money market interest rate is 2 percent per annum in the U.S. and 1.5 percent per annum in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable.
A. Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation.
B. Find the future value for the money market hedge?