IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥250 million payable in three months. Currently, the spot exchange rate is ¥105/$ and the three-month forward rate is ¥100/$.
The three-month money market interest rate is 8 percent per annum in the U.S. and 7 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) Conduct the cash flow analysis of the money market hedge.