--%>
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 : 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 : Why farmers were angry at Railroad

    Why were farmers angry at the Railroad companies?

    		•
  • Q : Explain production budget Give a short

    Give a short introduction of the term ‘production budget’?

    		•
  • Q : International and financial management

    Explain, how international financial management is different from the domestic financial management?

    		•
  • Q : Computing opportunity cost of producing

    Country C is able to generate seven pounds of food or four yards of textiles per unit of input. Calculate the opportunity cost of producing food rather than textiles.  Also, compute the opportunity cost of producing textiles rather than food.

    		•
  • Q : Assurance services Significant costs

    Significant costs associated with the disposal of asset. Accounting for asset retirement obligations requires estimating the cost and discounting estimate. The present value added to the asset's depreciable base and a liability is recorded for the obligation. Every year, interest expense is added

    		•
  • Q : Objectives of Bretton Woods’s system

    State main objectives of Bretton Woods’s system?

    		•
  • Q : Matlab Applications in Digital Signal

    Digital signal processing appears like a nightmare for students as it is most difficult and tricky subject in engineering core curriculum. If you are getting troubles in digital signal processing assignment or related project, then move

    		•
  • Q : Foreign entity’s functional and parent

    Specify some of instances under FASB 52 that foreign entity’s functional currency would be same as the parent firm’s currency.

    		•
  • Q : Advanced Accounting-Consolidated

    I have worked the problem. I need to know if it is correct. If not, what I'm missing.

    		•