1. The current exchange rate between Canada and Britain is 0.5268 per

QUESTION

1. The current exchange rate between Canada and Britain is 0.5268 per Canadian dollar. The three month forward rate between the British pound and the Canadian dollar is 0.4968 per dollar. What is the percentage difference between current three-month Canadian and British interest rates?
2. An Italian sports car is selling for 70 000 Euros. What is the Canadian dollar price for the Italian car if the exchange rate is 0.60 Euros per Canadian dollar? What is the U.S. dollar price for the Italian car if the exchange rate is 0.80 Euros per U.S. dollar?
3. The current exchange rate between the Canadian dollar and the euro is 0.60 Euros per Canadian dollar. If the Canadian dollar is expected to appreciate by 10% relative to the euro, what is the new expected exchange rate?
4. If the price level recently fell by 5% in Canada while increasing by 20% in Europe, how much must the exchange rate change if PPP holds? Assume that the current exchange rate is 0.60 Euros per Canadian dollar.
1. Interest rate parity = X1/X0 = (1+If)/(1+Id) .4968/.5268=.943, accordingly difference is approx 6%. 2. Canadian dollar price for the Italian car = 70000/.60 = 116666.67 U.S. dollar price for the Italian car = 70000/.80 = 87500 3. New expected Exchange RATE =¦

.60/.90 = .667 Euros per Canadian dollar. 4. New exchange rate: X1/.60 = (1+.20)/(1-.05) X1 = .757895 Exchange rate change = .757895-.60 = .1578795 Euros per canadian dollar

ANSWER:

CLICK REQUEST FOR  AN EXPERT SOLUTION