While you were visiting London, you purchased a Jaguar for 60,000, payable in three months. You have enough cash at your bank in New York City, which pays 0.35% interest per month, compounding monthly, to pay for the car. Currently, the spot exchange rate is $1.45/ and the three-month forward exchange rate is $1.40/. In London, the money market interest rate is 5.0% for a three-month investment (periodic rate). There are two alternative ways of paying for your Jaguar.

(a) Keep the funds at your bank in the U.S. and buy 60,000 forward.

(b) Buy a certain pound amount spot today and invest the amount in the U.K. for three months so that the maturity value becomes equal to 60,000.

Evaluate each payment method. Which method would you prefer? Why?

1.

Keep your money in the US and use a forward contract to convert into Pounds.

Cost of this strategy is $83124

2.

Convert your money into pounds and invest at the british pound rate of 5% for 2 months.

Cost of this strategy is $82857

3.

Keep your money in the US and use a forward contract to convert into pounds.

Cost of this strategy is $81145

4.

Convert into BP today and invest at the BP rate of 5% quarterly. Cost is 80,064