While you were visiting Munich, you purchased a Range Rover for 100,000, payable in six months. You have enough cash in US dollars at your bank in NY City, which pays 3% interest for six months, to pay for the car. Currently, the spot exchange rate is $1.35/ and the six-month forward exchange rate is $1.30/. In Munich, the money market interest rate is 4% for six months. There are two alternative ways of paying for your Range Rover.

a. Keep the funds at your bank in the US and buy 100,000 forward.

b. Buy a certain amount of spot today and invest the amount in Germany for six months so that the maturity value becomes equal to 100,000. Evaluate each payment method in terms of $ cost. Which method would you prefer? Why?