You are currently planning a trip you will be taking to London in six months’ time. The travel agent through whom you are booking the tour is based in England. She has called you today and informed you that she requires the travel costs of 5000 British pounds (BP) immediately. Your problem is that you don’t have any cash on hand; the tour is going to be financed with a cash bonus which you will not get until immediately before the trip. You therefore need to borrow the money. Given the information below and ignoring transactions costs, should you borrow in the US market or the British market? State your reasoning and show all calculations.
• Your six-month U.S. borrowing rate (annualized): 4.5%
• Your six-month UK borrowing rate (annualized): 5.5%
• Current spot exchange rate for you: $1.2600/BP
• Current 6 month forward exchange rate for you: $1.2698/BP