If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then
A) an investor should invest only in dollars if the expected dollar depreciation against the euro is 8 percent.
B) an investor should invest only in euros if the expected dollar depreciation against the euro is 8 percent.
C) an investor should be indifferent between dollars and euros if the expected dollar depreciation against the euro is 8 percent.
D) an investor should invest only in dollars.
E) an investor should invest only in euros.

Question

Quizplus · Accepted Answer

The investor should compare the interest rate differential with the expected exchange rate movement. In this case, the interest rate differential is 4% (10% - 6%), and if the expected dollar depreciation against the euro is 8%, then the investor should invest only in euros to earn a higher return.

If the Dollar Interest Rate Is 10 Percent and the Euro