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    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
    Canada? Explain.

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    Solution Preview

    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
    Sell ...

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