Problem 20-4 Using Spot and Forward Exchange Rates Suppose the spot exchange rat

Question

Problem 20-4 Using Spot and Forward Exchange Rates

Suppose the spot exchange rate for the Canadian dollar is Can$1.08 and the six-month forward rate is Can$1.10.

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

Assuming absolute PPP holds, what is the cost in the United States of an Elkhead beer if the price in Canada is Can$3.09? (Enter your answer as directed, but do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

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

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

Suppose the spot exchange rate for the Canadian dollar is Can$1.08 and the six-month forward rate is Can$1.10.

Explanation / Answer

a. US dollar is worth more than canadian dollar as forward rate is higher than spot rate for canadian dollar.

b. Cost in US dollar -3.09/1.08 = $ 2.86

c. Premium- US dollar is at premium

d. US dollar- US dollar will appreciate in value as compared with canadian dollar.

e. Canada as higher interest will result in lower forward rate.

Please write back if you have any questions.

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