Commerce 3FC3 - International Finance Winter 2022
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3FC3 – Winter 2023
Commerce 3FC3 - International Finance
Winter 2022
Assignment No. 2
Question 1. The price of a commodity in Europe is e 135, whereas the price of the same commodity in Canada is CN$235. The current exchange rate of the euro in terms of Canadian dollar is 1.4724.
a) Is the law of one price (LOP) satisfied or violated? Explain and show your work.
b) In part a), if the LOP is violated, explain the direction of arbitrage, and find the per unit arbitrage profit?
c) Calculate the exchange rate compatible with the LOP, and then determine whether the CN$ is overvalued or undervalued and find the
percentage of the over or undervaluation? Show your work.
Question 2. Suppose that the exchange rate of the euro in terms of the Canadian dollar is 1.4724. According to PPP, what will happen to the exchange rate under each of the following circumstances? In each case, which currency (the dollar or euro) will appreciate or depreciate and by how much, and what is the level of the new exchange rate.
a) The Canadian price level increases by 4.5 percent and the price level in Europe increases by 1.5 percents.
b) The Canadian price level decreases by 4.5 percent and the price level in Europe increases by 2.5 percent.
This assignment is due on Wednesday, March 22nd, 2023, at 11:59 PM. Submit via A2L.
Good luck
2023-03-22