Question

Suppose the spot exchange rate for the Canadian dollar is Can$1.04 and the six-month forward rate is Can$1.06.

  

a. Which is worth more, a U.S. dollar or a Canadian dollar?

  

Canadian dollar

U.S. 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$2.69? (Enter your answer as directed, but do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

  

Cost in U.S. dollars           $

  

c. Is the U.S. dollar selling at a premium or a discount relative to the Canadian dollar?

premium

discount

d. Which currency is expected to appreciate in value?

Canadian dollar

U.S. dollar

e. Which country do you think has higher interest rates—the United States or Canada?

the United States

Canada

Answer 1

a) US dollar is worth more as 1 US dollar is worth 1.04 canadian dollars

b) Cost in US shall be according to exchange rate if PPP holds
=2.69/1.04=2.59 US dollars

c) US dollar is selling at premium to canadian dollar as one US dollar yields more than 1 canadian dollar

d)US dollar is likely to appreciate as the forward rate is hhigher than the spot rate

e) Canada is likely to have higher interest rates as Canadian dollar is likely to depreciate against US dollar