Assume that the interest rate in a foreign country is 6% and that the foreign currency is expected to depreciate by 2% during the year. For each dollar that an Australian resident invests in foreign bonds, he/she can expect to get back a total of:
A) $0.94.
B) $1.24.
C) $1.14.
D) $1.04.
E) $0.84.

Question

Quizplus · Accepted Answer

The expected return is calculated by adjusting the foreign interest rate for the expected depreciation of the foreign currency: 1 + 0.06 - 0.02 = 1.04, meaning the investor can expect to get back $1.04 for each dollar invested.

Assume That the Interest Rate in a Foreign Country Is