E xc han g e Ra t e Risk Your start-up company has negotiated a contract to provide a database

E xc han g e Ra t e Risk

Your start-up company has negotiated a contract to provide a database installation for a manu- facturing company in Poland. That firm has agreed to pay you $100,000 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.

a. 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	3.1433	3.1429	3.1419	3.1390	3.1361
sale	3.1764	3.1761	3.1755	3.1735	3.1712
purchase	3.7804	3.7814	EUR 3.7836	3.7871	3.7906
sale	3.8214	3.8226	3.8254	3.8298	3.8342
purchase	5.5131	5.5131	GBP 5.5112	5.5078	5.5048
sale	5.5750	5.5750	5.5735	5.5705	5.5681

What exchange rate could you lock in for the zloty in three months? How many zloty should you demand in the contract to receive $100,000?

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.