Gamma is a company based in Poland. The company expects to receive 1,500,000 in six months...

   

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Gamma is a company based in Poland. The company expects to receive 1,500,000 in six months from a foreign customer. The company is concerned that euro may depreciate against Polish zloty before the foreign customer makes the payment and is looking for ways to hedge that receipt. The spot exchange rate is 4,25PLN per 1. The domestic short-term interest rate is 2% per year and the foreign short-term interest rate is 4%. a) (2 points) Discuss the nature of risk faced by Gamma. b) (2 points) On what grounds can someone believe that euro may depreciate against Polish zloty? c) (1 point) What is the six-month forward exchange rate predicted by interest rate parity? d) (5 points) Would there be room for arbitrage if a six-month interest rate futures can be bought/sold at 4,3PLN per 1? If arbitrage is possible, describe actions that need to be performed in order to realise arbitrage profit. Gamma is a company based in Poland. The company expects to receive 1,500,000 in six months from a foreign customer. The company is concerned that euro may depreciate against Polish zloty before the foreign customer makes the payment and is looking for ways to hedge that receipt. The spot exchange rate is 4,25PLN per 1. The domestic short-term interest rate is 2% per year and the foreign short-term interest rate is 4%. a) (2 points) Discuss the nature of risk faced by Gamma. b) (2 points) On what grounds can someone believe that euro may depreciate against Polish zloty? c) (1 point) What is the six-month forward exchange rate predicted by interest rate parity? d) (5 points) Would there be room for arbitrage if a six-month interest rate futures can be bought/sold at 4,3PLN per 1? If arbitrage is possible, describe actions that need to be performed in order to realise arbitrage profit.