--%>
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 : Define Financial Calculator Financial

    Financial Calculator: A financial calculator is an electronic calculator which executes financial functions commonly required in business and commerce communities.

    		•
  • Q : Fisher Effect and Purchasing Power

    Explain and discuss the significance of Fisher Effect and the Purchasing Power Parity theories to a foreign exchange dealer in the merchant bank?

    		•
  • Q : Liabilities and Assets in Balance Sheet

    Why Liabilities are always on the left side and Assets on right side in the Balance Sheet?

    		•
  • Q : Forward cross-rates in German terms

    Compute 30-, 90-, and 180-day forward cross exchange rates between German mark and Swiss franc by utilizing the most recent quotations.  Specify forward cross-rates in “German” terms.

    		•
  • Q : Regions where uniform costing can be

    Write down the regions where uniform costing can be executed?

    		•
  • Q : International portfolio for buying

    Why it is easier for an investor willing to diversify his portfolio internationally for buying depository receipts instead of actual shares of the company?

    		•
  • Q : Define status and role Define status

    Define status and role, explain the difference between the two, provide illustrations.

    		•
  • Q : Computing cross-rate matrix Compute

    Compute cross-rate matrix for French franc, Japanese yen, German mark, and the British pound. Utilize most recent European term quotes in order to compute the cross-rates in order that the triangular matrix result is same as that of the portion above diagonal in Exhib

    		•
  • Q : Define Purchase return Describe the

    Describe the term Purchase return with suitable example?

    		•
  • Q : Assessing risk in the workplace

    Describe the primary steps in assessing risk in the workplace with respect to Health and safety, identify and discuss what actions should be taken to manage or wipe out the risks posed?

    		•