Radiotron Inc., a medium-scale Canadian component vendor to global healthcare equipment manufacturing giants, has three plants located in UK, Germany and the US. This is apart from the plant near Kingston in Canada. These plants produce precision superconducting coils, gradient coils, radiofrequency (RF) coils for use in the manufacture of advanced Magnetic Resonance Imaging (MRI) scanners (used in medical diagnostics).

As a key financial and strategy person at Radiotron Canada, the treasury head faces a constant challenge to plan the requirement and use of foreign currencies on a continuous basis. The currencies are the British Pound, Euro and US Dollar. The last two years have been a stressful period with the impact of Brexit, the cycle of political crisis, the pandemic effects, the supply chain pressure and more recently the war in Ukraine. All have added to the complexity and volatility of the currencies.

Interest rates in Germany (Euro) are 2.25%, in Canada (CAD) 3.75% and UK (Pound Sterling) 3.75%. International commerce as we know it would not be possible without a robust foreign exchange market.

Last evening, as the treasury head of Radiotron sat down at the lounge in the Ottawa International Airport, his eyes caught an old issue of the Economist featuring the Mac Index. At that instant, he wished that the exchange rates reflect the PPP. That would be a lot more closer to ground reality.

This raises some important questions.

Q1. Existing exchange rates generally do not reflect the PPP Theory (of Exchange Rate). What are the significant reasons for it? Based on your understanding and the context given, is the CAD likely to appreciate or depreciate with respect to the Euro; and at what rate? Would this make a impact to Radiotron Inc? If so, what kind of impact?