Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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
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 $110,000 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 1 month 2 months 3 months purchase sale 3.1392 3.1793 3.1398 3.1766 3.1354 3.1764 3.1396 3.1753 2 weeks USD 3.1417 3.1747 EUR 3.7814 3.8226 GBP 5.5131 5.5750 purchase sale 3.7804 3.8214 3.7836 3.8254 3.7871 3.8298 3.7906 3.8342 purchase sale 5.5131 5.5750 5.5112 5.5735 5.5078 5.5705 5.5048 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 $110,000? 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. 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 $110,000 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 1 month 2 months 3 months purchase sale 3.1392 3.1793 3.1398 3.1766 3.1354 3.1764 3.1396 3.1753 2 weeks USD 3.1417 3.1747 EUR 3.7814 3.8226 GBP 5.5131 5.5750 purchase sale 3.7804 3.8214 3.7836 3.8254 3.7871 3.8298 3.7906 3.8342 purchase sale 5.5131 5.5750 5.5112 5.5735 5.5078 5.5705 5.5048 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 $110,000? 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
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started