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 100,000 CAD in three-month’s 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 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. The current spot exchange rate is 2.3117 PLN per CAD. The three-month forward exchange rate is 2.2595 PLN per CAD. How many PLN should you demand in the contract to receive 100,000 CAD in three months if you hedge the exchange rate risk with a forward contract?

b. Given the bank forward rates in part (a), were short-term interest rates higher or lower in Poland than in Canada? Explain