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.

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