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 7 percent per annum in the U.S. and 8 percent per annum in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable.

• 1. Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation.

2. Conduct the cash flow analysis of the money market hedge.