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Your start-up company (ABC) in the United States has negotiated a contract to provide a database installation for a manufacturing company in Poland (POL). Company
Your start-up company (ABC) in the United States has negotiated a contract to provide a database installation for a manufacturing company in Poland (POL). Company ABC and Company POL have agreed that the full price of installation is US$100,000. This amount is to be paid in three months time. However, your client Company POL insists on signing the contract and paying in Polish zloty (PLN) because they do not want to bear the exchange risk. You don't want to lose the deal (POL 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, so that you are guaranteed to receive US$100,000 in three months. a) You find the following table posted on the bank's Web site, showing the forward foreign exchange rates for zloty per dollar and zloty per euro: 1 week 2 weeks 1 month 2 months 3 months 3.1433 3.1764 USD purchase sale EUR purchase sale 3.1429 3.1761 3.1419 3.1755 3.1390 3.1735 3.1361 3.1712 3.7804 3.8214 3.7814 3.8226 3.7836 3.8254 3.7871 3.8298 3.7906 3.8342 zloty per USD The exchange rate you could lock in to convert zloty to USD in three months is: (Enter your answer as X.XXXX) The amount of zloty that you should demand in the contract to receive US$100,000 is: your answer as an integer, for example, 1234567) zloty. (Enter b) Assume that covered interest parity holds. 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? (Type in 1 if the Polish interest rate is higher than the US interest rate, and 0 otherwise) (Type in 1 if the Polish interest rate is higher than the euro How did Polish rates compare to euro rates? interest rate, and 0 otherwise)
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