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

Question

Quizplus · Accepted Answer

First, we calculate the expected return on euros: 
1.05 (1 + 0.05) / 1.166 - 1 = -0.0538, or -5.38%
Then, we calculate the return on dollars: 
1.1 (1 + 0.1) - 1 = 0.21, or 21%
Finally, we add the returns together: 
0.21 + (-0.0538) = 0.1562, or 15.62%
Therefore, the expected dollar rate of return on euro deposits is 15%, which corresponds to answer choice B.

What Is the Expected Dollar Rate of Return on Euro