Question
China Dolls Registry Ltd. has been notified that it has LOST a lawsuit initiated against them by a world renowned artist in the United Kingdom.
China Dolls Registry Ltd. has been notified that it has LOST a lawsuit initiated against them by a
world renowned artist in the United Kingdom. Terms of the judgement stipulate that China Dolls Registry
Ltd. must make a payment of 200,000 British pounds to the artist 1 year from now.
The controller of China Dolls Registry Ltd. has called you in to assist him in assessing options as to what
course of action should be followed to minimize the financial impact of the judgement. You determine
the current 1 year forward rate is 1.62 Canadian dollars per British pound, while the current spot rate is
1.5908 Canadian dollars per British pound.
The firm's line of credit with its bankers calls for interest at 6.7%, while the investment rate on GIC's is
4.5%.The company also has the option of borrowing in the United Kingdom at a rate of 7%, while the
market interest rate on GIC's in the United Kingdom is 5%.
The controller tells you that he estimates the spot rate for British pounds will actually be 1.6125 Canadian dollars
per British pound 1 year from now.
Required:
a)Advise the controller of China Dolls Registry Ltd. as to the course of action he should follow. Explain the
reasoning behind your decision. Showall relevant calculations,andstate any assumptions necessary
b)In addition to part (a), the controller has asked for your advice on how he could use options or
futures to best manage the payment of foreign funds.
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