Answered: IBM purchased computer chips from…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 1ST

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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.

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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