Your start-up company has negotiated a contract to provide a database installati
ID: 2794816 • Letter: Y
Question
Your start-up company has negotiated a contract to provide a database installation for a manufacturing company in Poland. That firm has agreed to pay you $103,500 in three months when the installation will occur. However, it insists on paying in Polish zloty (PLN). You dont want to lose the deal (the company is your first client), but you are worried about the exchange rate risk. In particular, you are worried the zloty could depreciate relative to the dollar. You contact Fortis Bank in Poland to see if you can lock in an exchange rate for the zloty in advance. a. Assume that the current spot exchange rate is 2.3779 PLN per U.S. dollar and that the three-month forward exchange rate is 2.2582 PLN per US. dollar. How many zloty should you demand in the contract to receive $103,500 in three months if you hedge the exchange rate risk with a forward contract? b. 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 of this contract? 582 PLN per US dollar. How many zioty Sho ve$1 on hree months a Assume at the current spot exchange rate is 2.3779 PLN per US dollar and that the three-month or ard e charge ate is if you hedge the exchange rate risk with a forward contract? d a demandint e contract to e You should require PLN. (Round to the nearest integer) b. 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 of this contract? (Sekect the best choice below.) O A. Because the spot rate is lower than the forward rate, the Polish interest rate must be lower than that of the U.S. B. Because the spot rate is lower than the forward rate, the Polish interest rate must be higher than that of the U.S. ° C. Because the spot rate is higher than the forward rate, the Polish interest rate must be higher than that of the US. OD. Because the spot rate is higher theorard rate, the Polish interest rate must be lower than that of the U.S.Explanation / Answer
a) No. of zloty = No. of USD x Forward Rate = 103,500 x 2.2582 = 233,723.7 PLN
b) As the value of US dollar is likely to depreciate versus PLN based on the forward rate, it is likely that Polish interest rates are lower than that of the US based on the interest rate parity hypothesis.
Hence, D appears plausible.
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