The dollar rate of return on euro deposits is
A) approximately the euro interest rate plus the rate of depreciation of the dollar against the euro.
B) approximately the euro interest rate minus the rate of depreciation of the dollar against the euro.
C) the euro interest rate minus the rate of inflation against the euro.
D) the rate of appreciation of the dollar against the euro.
E) the euro interest rate plus the rate of inflation against the euro.

Question

Quizplus · Accepted Answer

The dollar rate of return on euro deposits is approximately the euro interest rate plus the rate of depreciation of the dollar against the euro. This is because the return in dollars not only depends on the interest earned in euros but also on how the value of the euro changes relative to the dollar during the investment period. If the dollar depreciates against the euro, the value of the euro interest earnings when converted back to dollars is higher, thus increasing the overall dollar rate of return.

The Dollar Rate of Return on Euro Deposits Is