If the exchange at time t is Eₜ = €1/$. You invest $1 in an euro asset at t,which has an interest of 8%. When the asset expires at t+1,you get paid €________. If Eₜ+1 = €1.02/$,then you can buy back $________.

Question

Quizplus · Accepted Answer

1.08;1.06When you invest $1 in an euro asset at an exchange rate of €1/$, you essentially convert your $1 into €1. Given an 8% interest rate, after the investment period, you receive €1 * 1.08 = €1.08. If the exchange rate at t+1 is €1.02/$, to convert €1.08 back to dollars, you divide €1.08 by €1.02/$, which gives you $1.06.

If the Exchange at Time T Is Eₜ = €1