(Using Spot and Forward Exchange Rates) Suppose the spot exchange rate
for the Canadian dollar in Can $1.05 and the six- month forward rate is
Can $1.07.
a) Which is worth more, a U.S. dollar or a Canadian dollar?
b) Assuming absolute PPP holds, what is the cost of the United States
of an Elkhead beer if the price in Canada is Can$2.50? Why might the
beer actually sell at a different price in the United States?
c) Is the U.S. dollar selling at a premium or a discount relative to the Canadian dollar?
d) Which currency is expected to appreciate in value?
e) Which county do you think has higher interest rates- the United States or Canada? Explain.
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