IBM purchased computer chips from NEC, a UK company electronics concern, and was billed 12,000,000 payable in three months. Currently, the spot exchange rate is $1.40/ and the three-month forward rate is $1.36/. The three-month money market interest rate is 12 percent per annum in the U.S. and 8 percent per annum in UK. The management of IBM decided to use the money market hedge to deal with this yen account payable.

(a) Explain how IBM can eliminate the exchange rate exposure and compute the dollar cost of meeting the pound obligation.

(b) Conduct a cash flow analysis of the money market hedge.

PLEASE SHOW ALL CALCULATIONS