While you were visiting London, you purchased a Jaguar for 35,000, 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 2.0% for a three-month investment. There are two alternative ways of paying for your Jaguar.

(a) Keep the funds at your bank in the United States and buy 35,000 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 35,000.

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