Your? start-up company has negotiated a contract to provide a database installat
ID: 2613846 • 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 $105,000 in three months time when the installation will occur.? However, it insists on paying in Polish zloty? (PLN). You? don't want to lose the deal? (the company is your first? client!), but 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. You find the following table posted on the? bank's Web? site, showing zloty per? dollar, per? euro, and per British? pound:
a. What exchange rate could you lock in for the zloty in three? months? ______________(round to four decimal places). How many zloty should you demand in the contract to receive $105,000?? ____________________(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? Thus the Zloty interest rate was (above or below) the dollar interest rate?____________________
How did Polish rates compare to euro or pound? rates? In general, from the 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 rate appear to be _________(higher or lower) for the british pound, so the pound interest rate was (lower or higher)__________________at the time of these quotes. The euro forward rates are (lower or higher)_________________than the spot rates, however, suggesting that Polish interest rates were (higher or lower) ___________________ than those for the euro.
Explanation / Answer
Solution:
a. You could lock in an exchange rate of 3.1722 zloty per U.S. dollar in three months time through a forward contract with the bank.
In order to receive $105,000, you would therefore need to write the contract for 105,000 × 3.1722 = 333,081 zloty
b. The forward rates show that fewer zloty per $ are required for longer maturities. Thus, the zloty interest rate is below the $ interest rates.
In general, from the 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 rate appear to be _lower________ for the british pound, so the pound interest rate was _____higher_____________at the time of these quotes. The euro forward rates are ___higher______________than the spot rates, however, suggesting that Polish interest rates were ____higher_______________ than those for the euro.
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