--%>
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 : Firm cross-listed on foreign stock

    Explain why and how a firm’s capital cost can be reduced when stock of firm is cross-listed on foreign stock exchanges.

    		•
  • Q : China emerged as the important

    Explain facts that China has emerged as the second most imperative recipient of the FDI after United States in recent years?

    		•
  • Q : Implement a user-defined matlab

    Your solution to the problem should be housed within a while loop, which allows the grader to test your solution repeatedly without having to re-execute the script, as shown in class. You should first display the purpose of the program, and then you should prompt the

    		•
  • Q : Financial institutions & Economic growth

      It started with the US sub-prime mortgages on housing loans, which became worthless when home owners defaulted on their loans. The housing market promptly collapsed, wiping out Wall Street's revered investment banks and pull

    		•
  • Q : Swap broker and swap dealer State the

    State the difference between the swap broker and the swap dealer.

    		•
  • Q : Characteristics of Composite currency

    State the characteristics of the Composite currency bonds market instrument.

    		•
  • Q : Calculate depreciation expense for the

    On December 31, 20x3, the PPE Company purchased an asset costing $1,000,000. The asset’s useful life is expected to be 10 years with a residual value of $300,000. a. Calculate the depreciation expense for 20x4 using:

  • Q : How Eurocurrency is formed Explain how

    Explain how the Eurocurrency is formed.

    		•
  • Q : Capital budgeting analysis imperative

    State why is capital budgeting analysis so imperative for the firm?

    		•
  • 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%.

    		•