Question 2 (10 marks)

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. Show all relevant calculations, and state 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.