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 $107,000 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:

	1 week	2 weeks	1 month	2 months	3 months
USD
purchase	3.1471	3.1472	3.1454	3.1406	3.1408
sale	3.1737	3.1806	3.1771	3.1692	3.1731
EUR
purchase	3.7804	3.7814	3.7836	3.7871	3.7906
sale	3.8214	3.8226	3.8254	3.8298	3.8342
GBP
purchase	5.5131	5.5131	5.5112	5.5078	5.5048
sale	5.575	5.575	5.5735	5.5705	5.5681

a. What exchange rate could you lock in for the zloty in three months? How many zloty should you demand in the contract to receive $107,000?

What exchange rate could you lock in for the zloty in three months?

You could lock in an exchange rate of ____ zloty per U.S. dollar in three months time through a forward contract with the bank.(Round to four decimal places.)

How many zloty should you demand in the contract to receive $107,000?

You would need to write the contract for _____ zloty. (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? How did Polish rates compare to euro or pound rates? Explain.

Thus, the zloty interest rate is above or below the dollar interest rate.

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 rates appear to be lower or higher for 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 lower or higher those for the euro.