The US Imports Company purchased 100,000 Freedonian marks' worth of machinery from a firm in Zeppo, Freedonia. The value of the dollar in terms of the mark has been decreasing. The firm in Zeppo offered credit terms of "2/10, net 90." The spot rate for the mark is $0.55, and the 90-day forward rate is $0.56.
a. Compute the dollar cost of paying the account within the 10-day discount period.
b. Compute the dollar cost of buying a forward contract to liquidate the account in 90 days.
c. The differential between the correct answers to Parts (a) and (b) is the result of the time value of money (the discount for prepayment) and protection from currency value fluctuation. Determine the magnitude of each of these components.