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 ratesthe United States or Canada? Explain.