Why ppp or the law of one price may be violated

Reference no: EM13266024

Suppose the spot exchange rate for the Canadian dollar is Can$1.15 and the six-month forward rate is Can$1.19. Note: Both exchange rates are expressed as the number of units of foreign currency per U.S. dollar.

Question 1: Assuming purchasing power parity (PPP) holds, what is the cost in the U.S. of a Moosehead beer if the price in Canada is Can$2.50?

Question 2: Identify two reasons why PPP or the "law of one price" may be violated or may not hold.

Question 3: Is the Canadian dollar selling at a premium or a discount relative to the U.S. dollar in the forward market? Explain.

Question 4: Explain which currency (U.S. dollar or Canadian dollar) is expected to appreciate in value.

Reference no: EM13266024

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