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 a money market hedge to manage this yen account payable.

a$.$ Which kind of risk is IBM facing?

b$.$ A money market hedge involves borrowing or lending in different currencies. For instance, if a U$.$S$.$ company has a future payment in euros, it can borrow euros, convert them to dollars, and invest the dollars. When the payment is due, the company can use the euros to repay the loan. This approach can effectively lock in the exchange rate. Can you design a money market hedge

for IBM?

c$.$ Could IBM have hedged itself differently? Describe all other possible ways of hedging.