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Suppose IBM has a liability of 1,000,000, payable in three months. The company wants to...

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Finance

Suppose IBM has a liability of 1,000,000, payable in three months. The company wants to hedge foreign exchange risk using forward contracts. The current spot rate for the is $1.2415/, and the three-month forward rate is $1.2492/. i. What forward position should IBM enter into? ii. Suppose the spot exchange rate in three months time is either $1.2342/ or $1.2547/. Using this example, demonstrate how the forward contract in part i helps IBM eliminates foreign exchange risk exposure.

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