Question
While you were visiting London, you purchased a Jaguar for 34,900, payable in three months. You have enough cash at your bank in New York
While you were visiting London, you purchased a Jaguar for 34,900, 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 $1.35 per and the three-month forward exchange rate is $1.39 per . 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.
Required:
If you keep the funds at your bank in the United States and buy a 34,900 forward, what will be the dollar cost of the Jaguar you purchased?
Note: Do not round intermediate calculations. Round off the final answer to nearest whole dollar.
Alternatively, you can buy a certain pound amount spot today and invest the pound amount in the U.K. for three months so that the maturity value becomes equal to 34,900. What will the dollar cost of your Jaguar if you use this payment method?
Note: Do not round intermediate calculations. Round off the final answer to nearest whole dollar.
Which method would you prefer?
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