What is the expected dollar rate of return on euro deposits if today's exchange rate is $1.10 per euro, next year's expected exchange rate is $1.165 per euro, the dollar interest rate is 10%, and the euro interest rate is 5%?
A) 10%
B) 11%
C) -1%
D) 0%
E) 15%

Question

Quizplus · Accepted Answer

To calculate the dollar rate of return on euro deposits, we need to calculate the percentage change in the exchange rate and add the euro interest rate.

Percentage change in exchange rate = [(New exchange rate - Old exchange rate)/Old exchange rate] x 100
= [(1.165 - 1.10)/1.10] x 100
= 5.91%
 
Dollar rate of return = Percentage change in exchange rate + Euro interest rate
= 5.91% + 5%
= 10.91%
 
Therefore, the expected dollar rate of return on euro deposits is 11%.

What Is the Expected Dollar Rate of Return on Euro