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 128,600 CAD inthree-month's 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 PLN could depreciate relative to the CAD. You contact Fortis Bank in Poland to see if you can lock in an exchange rate for the PLN in advance.

a. Assume that the current spot exchange rate is 2.3822 PLN per CAD and that thethree-month forward exchange rate is 2.2502 PLN per CAD. How many PLN should you demand in the contract to receive 128,600 CAD in three months if you hedge the exchange rate risk with a forwardcontract?

b. Given the bank forward rates in parta, wereshort-term interest rates higher or lower in Poland than inCanada?