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In: Accounting

While you were visiting London, you purchased a Maserati for £100,000, payable in three months. You...

  1. While you were visiting London, you purchased a Maserati for £100,000, payable in three months. You have enough cash (dollars) at your bank account in New York City, which pays 0.25% interest per month, compounding monthly, to pay for the car. Currently, the spot exchange rate is 1.2900GBPUSD and the three-month forward exchange rate is 1.33GBPUSD. In London, the annual money market interest rate is 2.0%.

There are two alternative ways of paying for your Maserati.

(a) Keep the funds at your bank in the U.S. and buy £100,000 forward.

(b) Buy a certain amount of pounds today at the spot market and invest the amount in the U.K. for three months.

Evaluate each payment method based on the amount of dollars you have to either invest or convert today. Which method (a or b) would you prefer? Why?

(c) Calculate the correct forward rate for GBPUSD.

Solutions

Expert Solution

ekkarill92 answered 1 year ago
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