If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on euro-denominated assets is ________.

Question

Quizplus · Accepted Answer

The expected return on euro-denominated assets is 3 percent. This is because the interest rate on euro-denominated assets is 7 percent, and the dollar is expected to appreciate at a 4 percent rate. This means that the expected return on euro-denominated assets in dollar terms is 7 percent - 4 percent = 3 percent.

If the Interest Rate Is 7 Percent on Euro-Denominated Assets