Imaginevisitingoverseas,where you winthe local lottery and can buy anyforeigncar you wishandwillpay fullretailprice using the local currency, payable in three months. Youhave determined that youhave enough cash at your bank in New York City, which pays 0.35 percent interest per month, compounding monthly, to pay for the car. There are two ways to pay for yourcar:

Keep the funds at your bank in the United States and buyaforwardcontract to pay for the car.

Buy a certaincurrencyamount spot today and invest the amount in theforeign bankfor three months so that the maturity value becomes equal tothe price of the car.