--%>
Assignment Help - homework help

Payment method-Buy pound or investing amount in U.K.

When you have visited the London, you have purchased a Jaguar for £35,000, which is payable within the three months. Enough cash is there at your bank in the New York City that pays 0.35% of interest per month, compounding monthly, to pay for car. Presently, spot exchange rate is $1.45/£ and three-month forward exchange rate is $1.40/£. In London, interest rate of money market is 2.0% for the three-month investment. There exist two optional ways of paying for your Jaguar.

(a) Keep the funds in your bank within the U.S. and buy £35,000 forward.

(b) Buy some pound amount spot today and then invest the amount in U.K. for three months in order that maturity value becomes equal to £35,000. Estimate each payment method. Which of the method you would prefer and why? 

E

Expert

Verified

This problem situation can be summarized as:

A/P = £35,000 is payable within three months

iNY = 0.35%/month, compounding monthly

iLD = 2.0% for three months

S = $1.45/£;    F = $1.40/£.

Option a:

  When you will buy £35,000 forward, you require $49,000 within three months in order to fulfill forward contract. Present value of $49,000 is calculated as:

     $49,000/(1.0035)3 = $48,489.

Therefore, cost of the Jaguar as of today is $48,489.

Option b:

   The current value of the £35,000 is £34,314 = £35,000/(1.02). In order to buy £34,314 today, it can cost $49,755 = 34,314x1.45. Therefore, the cost of the Jaguar as of today is $49,755.

Definitely “option a” should be used, and save $1,266, that is the main difference between $49,755 and $48489. 

   Related Questions in Financial Accounting

  • Q : Matlab Applications in Control System

    Student faces a lot of difficulties in Matlab control system assignments and topics. If you are also having same issues and problems then www.tutorsglobe.com is the best available solution for you. We have highly skilled and experienced tu

    		•
  • Q : Help Otobai Motor Company is currently

    Otobai Motor Company is currently paying a dividend of $1.40 per year. The dividends are expected to grow at a rate of 18% for the next three years and then a constant rate of 5% thereafter forever. What is the value of its current stock price? Assuming that the discount rate is 10%.

    		•
  • Q : Holding Period Describe the term

    Describe the term Holding Period?

    		•
  • Q : Objective Questions on Sociology 1)

    1) Which large European city declined significantly in population over the past century? A) Paris B) London C) Rome D) Madrid 2) The industrial city was characterized b A) decentralization B) corporate growt

    		•
  • Q : Applications of Matlab in Embedded

    Do you face difficulty with embedded system problems using matlab? Do you require help in embedded system assignment and project? We have team of tutors who are highly qualified and practiced in embedded system using matlab. They have vast industrial knowledge of matlab. W

    		•
  • Q : What is Bank errors What is Bank errors

    What is Bank errors. Briefly define it with respect to Accountancy?

    		•
  • Q : Random walk model for exchange rate

    Explain about random walk model for exchange rate forecasting. Will it be reliable with the technical analysis?

    		•
  • Q : Calculate the PV You expect the price

    You expect the price of the stock 3 years from now to be $119.04 (i.e., you expect P ˆ   3  ?? = $119.04). Discounted at a 10% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $119.04.&nb

    		•
  • Q : Prepare the journal entry to record the

    The Webster Company uses the aging method to estimate the allowance for doubtful accounts. The following schedule of accounts receivable was prepared as at December 31, 20x6: Age Balance % uncollectible 0-30 days $674,000 0.5% 31-60 days 186,000 1.2% <

    		•
  • Q : Maintaining multiple manufacturing

    Write down disadvantages and advantages of maintaining the multiple manufacturing sites as the hedge against exchange rate exposure.

    		•