KB Distributing Inc. has been notified that it has won a lawsuit against a competitor in...

KB Distributing Inc. has been notified that it has won a lawsuit against a competitor in Europe for

copyright infringement. Terms of the judgement stipulate that payment of 500,000 Euros will be

made to KB Distributing Inc. at the end of twelve months.

The controller of KB Distributing Inc. has called you in to assist him in assessing options as to what

course of action should be followed to take best advantage of the judgement.

You determine that the current 12-month forward rate for Euros is 1.55 Canadian dollars for one

Euro, while the current spot rate for Euros is 1.54 Canadian dollars. The firm's line of credit with its

Canadian bankers calls for interest of 6%, while the interest on borrowed money in Europe is 5.5%.

The firm can invest in Canadian GIC's at 5 % and in Europe at the rate of 4.5 %. The controller tells

you that he estimates the spot rate for Euros will be 1.56 Canadian dollars for one Euro twelve

months from now.

Required

a) Advise the controller of KB Distributing Inc. 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 protect the receipt from the lawsuit.

Expert Solution

jeff jeffy answered 1 year ago

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