IBM purchased computer chips from Toshiba, 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% per year in the U.S. and 7% per year 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 from this deal and compute the dollar cost of meeting the yen obligation. b. Conduct the cash flow analysis of the money market hedge.

IBM purchased computer chips from Toshiba, 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% per year in the U.S. and 7% per year 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 from this deal and compute the dollar cost of meeting the yen obligation. b. Conduct the cash flow analysis of the money market hedge.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 3P

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