Yourstart-up company has negotiated a contract to provide a database installation for a manufacturing company in Poland. That firm has agreed to pay you $128,300 in three months time when the installation will occur.However, it insists on paying in Polish zloty(PLN). Youdon't want to lose the deal(the company is your firstclient!), but you are worried about the exchange rate risk. Inparticular, 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 2.3204 PLN per U.S. dollar and that thethree-month forward exchange rate is 2.2287 PLN per U.S. dollar. How many zloty should you demand in the contract to receive $128,300 in three months if you hedge the exchange rate risk with a forwardcontract?

b. Given the bank forward rates in part (a), wereshort-term interest rates higher or lower in Poland than in the United States at the time of thiscontract?