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 United States and 7...

a Lets first compute the PV of 250 million ie 250m10175 2 ...

IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed 250 million payable in

Question:

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

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...