While you were on a trip to Los Angeles, you purchased a Mercedes Benz for $40,000 payable in five months. You have enough money at your bank in Paris, which pays a 0.40% interest per month, compounding monthly, to pay for your car. At this moment, the spot exchange rate is 0.85/$ and the five-month forward exchange rate is 0.83/$. In Los Angeles, the dollar market interest rate is 2.5% for a five-month investment. There are two alternative options for paying your Mercedes Benz (neglecting transaction costs).

1)Keep the funds at your bank in Paris and buy a $40,000 forward contract.

2)Buy a certain dollar amount spot today and invest that amount in the United States for five-months so that the maturity value will become equal to the $40,000.

Which option you should choose and What is the difference in the cost of the two options in euros at time 0?

Select one:

a. Option1, 626.84 EUROS

b. Option2, 626.84 EUROS

c. Option2, 662.84 EUROS

d. Option1, 662.84 EUROS