Mr. Peters is importing Tea from India. The value of his import is £100,000 payment for which is due now but delivery will be in 3 months. Considering the liquidity condition of his firm, Mr. Peters will need to borrow this money from the bank now. He should be able to repay the bank in 3 months. The interest rates in UK and India are 4% and 8.5% respectively (compounded annually). The current spot rate is INR 92.8741/£1.00. The 3- month forward rate is INR 93.86285/£1.00.

1. Will there be any difference if whether Mr. Peters (a) borrows in INR from an Indian bank, converts it to £ to make the payment, and pays back the loan through the forward contract or (b) to directly borrow £ from a UK-based bank to make the payment?

Answer rating: 100% (QA)

Solution Spot Rate 1 3 Month Forward Rate 1 UK Interest Rate 1 ... View the full answer