--%>
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 : Drug maker-stymie generic competition

    Drug maker want to stymie generic competition. Elucidate this statement.

    		•
  • Q : Define Budgetary Control Give a brief

    Give a brief introduction of the term ‘Budgetary Control’ also writes down its characteristics?

    		•
  • Q : Discrimination to women and minority

    Most of the organizations have established policies to remedy discrimination whenever hiring women and minorities. Discuss whether you feel that affirmative action programs, reverse discrimination, and criteria of comparable worth are suitable forms of remedy. You mus

    		•
  • Q : Account A structure for showing the

    A structure for showing the effect of market events on a particular asset, liability, equity, earnings, or expense. The effects are measured in terms of dollars. The account looks like as a collection point in the meanwhile the processing of all the transactions involving the balance sheet or inc

    		•
  • 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 : Abatement The process of allocating the

    The process of allocating the arrears of estate assets to the distributions. Distributions from the estate proceed in a particular order starting with specific legacies, effusive legacies, general legacies, and finally residuary legacies. If legacies assets are not capable to meet the will's prov

    		•
  • Q : What is the opening accounts receivable

    Big Problem Ltd., an oil refining business uses an allowance system to account for bad debts. At the beginning of the year the allowance had a credit balance of $16,000. The following transactions took place during the year. a) Tot

    		•
  • 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

    		•
  • Q : Demerits of implementing Uniform Costing

    Write down the demerits of implementing Uniform Costing?

    		•
  • Q : Merits of standard costing Write down

    Write down the merits of standard costing?

    		•