Question

15. IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed 4250 million payable in three months. Currently, the spot exchange rate is V105/$ and the three-month forward rate is V100/S. The three-month money market interest rate is 8 percent per annum in the U.S. and 7 percent per annum in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable. Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation.

please provide calculation steps

Answer 1

	Amount payable in Japan in million	250
	Spot rate per USD	105
	Forward rate per USD	100
	Amount payable in USD @ spot rate	250/105	$ 2.3810
	Amount payable in USD @ forward rate	250/100	$ 2.5000
	Money market operation
	The amount is borrowed today in US and deposited in Japan which in turn gets paid on due date.
	Amount payable in Japan today=	250/(1+7%*3/12)
	Amount payable in Japan today=	245.70	Million
	This amount gets converted to USD today=	245.70/105
	Equivelent USD at spot rate	2.34	million
	This amount will be borrowed in US for 3 months @ 8%
	Amount payable in US after 3 months	=2.34*(1+8%*3/12)
	Amount payable in US after 3 months	$           2.3868