In the summer of 2008, at Heathrow airport in London, Bestofthebest (BB), a priv
ID: 2784945 • Letter: I
Question
In the summer of 2008, at Heathrow airport in London, Bestofthebest (BB), a private company, offered a lottery to win a Ferrari or 112,000 British pounds, equivalent at the time to about $224,000. Both the Ferrari and the money, in 100 pound notes, were on display. If the U.K. interest rate was 6%per year, and the dollar interest rate was 2%per year (EARs), how much did it cost the company in dollars each month to keep the cash on display? That is, what was the opportunity cost of keeping it on display rather than in a bank account? (Ignore taxes.)Hint: Make sure to round all intermediate calculations to at least five decimal places.
Explanation / Answer
Offer by Lottery = GBP 112,000 or a Ferrari.
Amount in Dollar = $224,000
So spot exchnage rate = $224,000 / GBP 112,000
= $2 per GBP.
Cost per month = $224,000 × 6% / 12
= $1,120.00000.
Cost the company in dollars each month to keep the cash on display is $1,120.00000