If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets,and if the dollar is expected to appreciate at a 4 percent rate,the expected return on ________-denominated assets in ________ percent.

Question

Quizplus · Accepted Answer

The expected return on euro-denominated assets in dollars is 3 percent. This is because the interest rate on euro-denominated assets is 7 percent, and the dollar is expected to appreciate at a 4 percent rate. Therefore, the expected return on euro-denominated assets in dollars is 7 percent + 4 percent = 11 percent. However, the expected return on dollar-denominated assets in euros is 1 percent. This is because the interest rate on dollar-denominated assets is 5 percent, and the dollar is expected to appreciate at a 4 percent rate. Therefore, the expected return on dollar-denominated assets in euros is 5 percent - 4 percent = 1 percent.

If the Interest Rate Is 7 Percent on Euro-Denominated Assets