What is the expected dollar rate of return on euro deposits if today's exchange rate is $1.10 per euro,next year's expected exchange rate is $1.166 per euro,the dollar interest rate is 10%,and the euro interest rate is 5%?

Question

Quizplus · Accepted Answer

The expected dollar rate of return on euro deposits can be calculated using the formula:
Expected dollar rate of return = (1 + Euro interest rate)/(1 + Dollar interest rate) * (Expected exchange rate/Euro exchange rate) - 1

Substituting the given values:
Expected dollar rate of return = (1 + 0.05)/(1 + 0.1) * (1.166/1.10) - 1
Expected dollar rate of return = 0.95/1.1 * 1.06 - 1
Expected dollar rate of return = 0.9118 or 9.18%

Therefore, the closest answer choice is B) 11%.

What Is the Expected Dollar Rate of Return on Euro