While you were visiting Paris, you purchased a diamond jewelry set for EUR 27,000, payable in five months. You have enough cash at your bank in San Francisco, which pays 0.25% interest per month, compounding monthly, to pay for the set. Currently, the spot exchange rate is $1.15/EUR and the five-month forward exchange rate is $1.135/EUR. In Paris, the annual money market interest rate is 3.6%. There are two alternative ways of paying for your Jaguar.

(a) Keep the funds at your bank in the U.S. and buy EUR 27,000 forward.

(b) Buy a certain euro amount spot today and invest the amount in France for five months so that the maturity value becomes equal to EUR 27,000.

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