Foreign Auto Purchase

Price: $10 USD

Question description

While you were visiting London, you purchased a Jaguar for £35,000, payable in three months. You have enough cash at your bank in New York City, which pays 0.35 percent interest per month,

compounding monthly, to pay for the car. Currently, the spot exchange rate is $1.45/£ and the three-month

forward exchange rate is $1.40/£. In London, the money market interest rate is 2.0 percent for a three-

month investment. There are two ways to pay for your Jaguar

a. Keep the funds at your bank in the United States and buy £35,000 forward.

b. Buy a certain pound amount spot today and invest the amount in the U.K. for three months so that the

maturity value becomes equal to £35,000.

1.Analyze the alternatives presented and make a recommendation on purchasing the Jaguar. Be sure to provide

support for your recommendation

2. Why do you prefer the stated alternative? What are the advantages of the alternative that you have selected?

Tutor Answer

(Top Tutor) Daniel C.
School: Duke University
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