Ch . 21 : Questions 4 & 7 ( Questions and Problems section )
4 . Using Spot and Forward Exchange Rates [ LO1 ] Suppose the spot exchange rate for the Canadian dollar is Can $ 1.09 and the six-month forward rate is Can $ 1.11 .
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 $ 2.50 ? 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 .
7 . Interest Rates and Arbitrage [ LO2 ] The treasurer of a major U . S . firm has $ 30 million to invest for three months . The interest rate in the United States is . 31 percent per month . The interest rate in Great Britain is . 34 percent per month . The spot exchange rate is £. 573 , and the three-month forward rate is £. 575 . Ignoring transaction costs , in