If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then an investor should
A) invest only in dollars.
B) invest only in euros.
C) be indifferent between dollars and euros.
D) invest only in dollars if the exchange rate is expected to remain constant.
E) invest only in euros if the exchange rate is expected to remain constant.

Question

Quizplus · Accepted Answer

The investor should invest only in dollars if the exchange rate is expected to remain constant because the higher interest rate on dollars provides a higher return on investment. However, if the exchange rate is expected to fluctuate, it becomes uncertain whether the return on investment will outweigh the potential losses from currency exchange.

If the Dollar Interest Rate Is 10 Percent and the Euro