Purchase Solution

# Using Spot and Forward Exchange Rates (Canadian Dollar)

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18-4. Using Spot and Forward Exchange Rates. Suppose the spot exchange rate for
the Canadian dollar is Can\$1.20 and the six-month forward rate is Can\$1.23.
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\$3.10? 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

##### Solution Summary

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a. US dollar as we can buy more number of canadian dollar for each unit of US dollar
b. =3.10/1.20 =2.583333333
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