If the dollar interest rate is 10 percent, the euro interest rate is 12 percent, then
A) an investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent.
B) an investor should invest only in euros. An investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent.
C) an investor should be indifferent between dollars and euros. An investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent.
D) an investor should invest only in dollars.
E) an investor should invest only in euros.

Question

Quizplus · Accepted Answer

If the expected dollar appreciation against the euro is 4 percent, the effective return on dollar investments would be 14 percent (10% interest + 4% appreciation), which is higher than the 12 percent euro interest rate, making dollar investments more attractive.

If the Dollar Interest Rate Is 10 Percent, the Euro