Suppose the spot exchange rate for the U.S. dollar is CDN$1.18 and the six-month forward rate is CDN$1.13.
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 CDN$2.19? 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 country do you think has higher interest rates—the United States or Canada? Explain.

  • CreatedJune 17, 2015
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