Suppose the spot exchange rate for the Canadian dollar is Can$1.10 and the six-m
ID: 2658747 • Letter: S
Question
Suppose the spot exchange rate for the Canadian dollar is Can$1.10 and the six-month forward rate is Can$1.07.
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$3.14? (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?
discount
premium
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
Explanation / Answer
Suppose the spot exchange rate for the Canadian dollar is Can$1.10 and the six-month forward rate is Can$1.07.
a. Which is worth more, a U.S. dollar or a Canadian dollar?
Ans : 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$3.14? (Enter your answer as directed, but do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
Ans: Cost in U.S. dollars = 3.14/1.1 = $ 2.85
c. Is the U.S. dollar selling at a premium or a discount relative to the Canadian dollar?
Ans: premium
d. Which currency is expected to appreciate in value?
Ans: Canadian dollar
Because the Future Exchange rate for Canadian Dollar is less. This means that in future, Canadian dollar will be less expensive which is a sign of appreciation
e. Which country do you think has higher interest rates—the United States or Canada?
Ans: the United States
The country with higher interest rate will face depreciation in currency in future. Here as Canadian Dollar is appreciating meaning that US dollar is relatively depreciating. Thus US will have higner interest rate.
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