--%>
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 : MONEY MEASUREMENT CONCEPT DESCRIBE THE

    DESCRIBE THE ADVANTAGES AND DISADVANTAGES OF MONEY MEASUREMENT CONCEPT

    		•
  • Q : Explain Project Accounting Project

    Project Accounting: It is sometimes termed to as job cost accounting and is the practice of making financial reports particularly designed to track financial growth of projects, which can then be utilized by managers to support project management.

    		•
  • Q : Pre-requisites for accomplishment of

    Write down the pre-requisites for triumphant accomplishment of uniform costing?

    		•
  • Q : Balance per bank What does Balance per

    What does Balance per bank signify?

    		•
  • Q : Define the term Accounts Receivable

    Accounts Receivable: The money owed by customers (that is, individuals or corporations) to other entity in exchange for services or goods that have been employed or delivered, however not yet paid for. Receivables generally come in the form of operati

    		•
  • Q : Pre-requisites to apply Budgetary

    Write down the pre-requisites to apply Budgetary Control?

    		•
  • Q : Types of shares What are types of

    What are types of shares issued by a company

    		•
  • Q : Creation of North American Trade

    Mr. Ross Perot, former Presidential candidate of the Reform Party, that is the third political party in the United States, had strongly protested in the creation of North American Trade Agreement (NAFTA), however, which was inaugurated in the year 1994, due to fear of

    		•
  • Q : Japanese investments in the Southeast

    Japanese MNCs, like Toshiba, Toyota, Matsushita, and so on, made extensive investments within the Southeast Asian countries such as Malaysia, Thailand, and Indonesia. State your opinion, what forces are making Japanese investments within the region?

    		•
  • Q : Human race in our modern world Here are

    Here are two papers addressed to the in-class essay from the previous class. Study them in the context of the exact wording of the assignment and take some notes that will enable you to refer to specific features of the two papers when talking about their relative qua

    		•