Question

# Suppose the spot exchange rate for the Canadian dollar is Can\$1.06 and the six-month forward rate...

 Suppose the spot exchange rate for the Canadian dollar is Can\$1.06 and the six-month forward rate is Can\$1.08. a. Which is worth more, a U.S. dollar or a Canadian dollar? b. Assuming absolute PPP holds, what is the cost in the United States of an Elkhead beer if the price in Canada is Can\$2.89? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) 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 country do you think has higher interest rates—the United States or Canada?

ans a) US dollar has more worth because value of 1 USD = 1.06 can\$

it means whatever we can purchase using only 1USD , if payment is done in terms of canadian dollar, you have to pay 1.06 can\$ for same thing.

ans b) price of beer in Can\$= 2.89 Can \$

spot exchange rate is 1.06CAN \$ / 1USD

OR 0.943 USD / 1 CAN \$
price of beer in USD = 2.89CAN\$ * 0.943 USD / 1 CAN \$

=2.73 USD

C) AS DOLLAR PRICE in Forward market is greater than spot exchange rate (can\$1.08/1 USD> can\$1.06/ USD

dollar is said to be seeling at a premium

d)

as USD is seeling at premium it is likely to appreciate and Can \$ is likely to depreciate

e)according to interest rate parity theory , exchange rate forward premiiums or discounts nulifies the difference between the interest rate between the two countries as they will not be able to earn arbitrage profit

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