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 United States and $7$ percent per

annum in Japan. The management of IBM decided to use a 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 a cash flow analysis of the money market hedge.