Reference no: EM132492395

Consider trade between Canada and the European Union. Canada uses the $C and Europe uses the Euro. In 2018, a typical basket of goods in France cost Euro 100, while in Canada they cost $C150.

In 2019 the same basket of goods in Canada cost $C180, while those in France cost Euro 120.

The nominal, or spot, exchange rate in 2018 was Euro = $C1.50. In the first quarter of 2019 the spot exchange rate remained unchanged at Euro = $C1.50. At the end of 2018, the three-month forward exchange rate was Euro = $C1.60.

Interest rates on three-month bonds at the end of the first quarter of 2019 were 6% in Europe, and 4% in Canada. The three-month forward exchange rate at that time was Euro = $C1.45.

a) What is the Purchasing Power Parity value of the Euro in 2018?

b) What is the Purchasing Power Parity value of the Euro in 2019?

c) Is there any advantage to buying from Europe or Canada? Explain (ignore the impact of transportation costs and duties)

d) Suppose a European supplier was to sell goods to Canada at the end of 2018 and was to receive payment three months later. If the company was to hedge what would the value of payment for the goods be in Euros?

e) Assuming the company did not hedge, what would the difference be in the value of payment for the goods be in Euros versus the value if the company hedged?

f) Over the three-month period after the first quarter of 2019, what should happen to the value of the Euro in $c? Explain in detail.