• The Gamma Co. have contracted to purchase steel from Beta Co. in the Netherlands at a cost of EUR 20,000,000
• Delta Bank in Amsterdam quotes USD/EUR as 0.8325 and GBP/USD as 1.3343
• Alfa Bank in UK FX quotation for GBP/EUR is  1.1267
• 1 year money market interest rates for EUR are 2% and for GBP 4% (per annum)
• Annualised inflation in the Eurozone is 1% and in the UK it is 3.5 %

 

1.Calculate the cost in GBP to Gamma Co of conducting the spot FX transaction with Delta Bank or Alfa Bank and which should they use?

 

2. If Relative Purchasing Power Parity held what would you expect the GBP/EUR exchange rate to be in 6 months' time? (Base calculations on a spot GBP/EUR rate of 1.1267)