Question

Your start up a company has negotiated a contract to provide a database installation for a manufacturing company in Poland. The firm has agreed to pay you 108,000 in three months time when the installation will occur however it insists on paying in Polish Zioty(PLN). You don't want to lose the deal (the company is your first client) but are worried about the exchange risk, In particular, you are worried the Zioty could depreciate relative to the dollar. You contact Fortis Bank in Poland to see if you can lock in exchange rate for the Zioty in advance. You find the following table posted on the banks website, showing Zioty per dollar, per euro, and per British pound.

USD Purchase Sale

1 week

3,1392

3,1759

2 weeks

3,1402

3,1757

1 month

3,1373

3,1786

2 months

3,1359

3,1756

3 months

3,1384

3,1756

Purchase Price Euros

1 week

3,7804

3,8214

2 weeks

3,7814

3,8226

1 month

3,7836

3,8254

2 months

3,7891

3,8298

3 months

3,7906

3,8342

What exchange rate could lock in for Zioty in three months?

If you could lock in an exchange rate of _______ Zioty per US dollar in three months time through a forward contract with the bank.

You would need to write the contract for ______ Zioty

Given the bank forward rates in part (a) were short term interest rates higher or lower in Poland than in the United States at the time?

Thus the Zioty interest rate is_____the dollar interest rate

How did Polish rates compare to euro or pound rates, explain

In general from covered interest parity formula, we can tell which rate is higher by seeing if the forward rate is above or below the spot rate. From the table, the forward rates appear to be _______ for the British pound so the pound interest rate was at the time of these quotes the euro forward rates are______from the spot rates however suggesting that Polish interest rates were______than those for the euro.

Answer 1

If you could lock in an exchange rate of 3.1384 Zioty per US dollar in three months time through a forward contract with the bank.

You would need to write the contract for Selling Zioty

Given the bank forward rates in part (a) were short term interest rates higher or lower in Poland than in the United States at the time?

Thus the Zioty interest rate is more than_the dollar interest rate

How did Polish rates compare to euro or pound rates, explain

In general from covered interest parity formula, we can tell which rate is higher by seeing if the forward rate is above or below the spot rate. From the table, the forward rates appear to be lower for the British pound so the pound interest rate was at the time of these quotes the euro forward rates are lower from the spot rates however suggesting that Polish interest rates were_higher than those for the euro.