Reference no: EM132965327

Raptor Inc. has just signed a contract to purchase basketballs from a supplier in the United States. The terms of the contract stipulate that Raptor Inc. must pay $400,000 US one year from now. The president of Raptor Inc. has asked you to assess all the alternatives available and to advise the course of action to best take advantage of the contract. In order to advise the president you have had an assistant gather the following information. The current spot rate is $1.3460 CDN per $US and a one year forward contract can be purchased at a rate of $1.3650 CDN per $US. The accounting department has said that they expect the exchange rate to be $0.736 US per $CDN a year from now and that the local bank is charging a 9% interest rate on your line of credit while only offering a one year term deposit rate of 6%. However, in the US you would be able to borrow at a rate of 7% and invest at a rate of 5%.

REQUIRED:

Problem 1: Advise the president on what your alternatives are and what your recommended course of action should be. Explain the reasoning behind your decision. Show all calculations and state any assumptions necessary.