All orders placed with the company in question 1 during the third year are denominated in dollars and paid at the end of the year. As virtually all of the company ’ s expenses are in its local currency, the ruby, costs for the third year ’ s orders were calculated based on a forward dollar-to-ruby exchange contract secured from the company ’ s bank.

All orders placed with the company in question 1 during the third year are denominated in dollars and paid at the end of the year. As virtually all of the company ’ s expenses are in its local currency, the ruby, costs for the third year ’ s orders were calculated based on a forward dollar-to-ruby exchange contract secured from the company ’ s bank. The exchange rate on signing the contract is four rubies to the dollar. The U.S. interest rate curve derived from the return in a market where zero-coupon U.S. government bonds are traded is as follows:

a. What is the exchange rate reflected in the company ’ s calculations for its third-year orders? b. Demonstrate how the bank can offer this exchange rate without incurring any currency risk.