Problem:
Hewlett Packard purchased computer chips from Siemens, a German electronics concern, and was billed 5 million Euros payable in three months. Currently, the spot exchange rate is $1.46/Euro and the three-month forward rate is $1.51/Euro. The three-month money market interest rate is 8 percent per annum in the U.S. and 7 percent per annum in Germany. The management of Hewlett Packard decided to use the money market hedge to deal with this Euro account payable.
Required:
Question 1: Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation.
Question 2: Conduct the cash flow analysis of the money market hedge.
Note: Be sure to show how you arrived at your answer.