Question

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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 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.

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

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

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Answer 1

Bol! - Refer to the following Valves to calculate the Value of the following The amount that is billed for the Computer is Yen 250 million The spot exchange rate is you 150 per dollar and the 3-month forward rate is Yan loo par dollar The 3-month money market interest rate is sl. in the us and 7.1. per annum in Japan. 1. The first stap is to calculate the pr of the amount in 3 months at the Fl. annual rate. 7.1. is taken because the annual rate in japan is 7./. PV of the amount = 250 million - Citrate) = 250 million 1 + 4l. 14 = 250 million 1.07185903 -lyon 233239626.66993627 stop 2 The pv computed above is the amount in yan, hence use the us rate to calculate the value in dollars. The spot exchange rate is 105 you por dollar, hence

105 the amount in dollars is calculated as follows: Amount in dollars - PV : 2332 39626.6699362 105 - $ 2221329. 7778089 Hence, the dollar value requind is $2221329.78 b.) step 3: calculate the value of the Cash how as follows:

1 transaction 1 buy yen spot ($221,329.78) with dollarsyen 233239626.67 2 invset in japan -233239626.6700 yen 250000000 3 pay yens -250000000