What is the expected dollar rate of return on euro deposits with today's exchange rate at $1.167 per euro, next year's expected exchange rate at $1.10 per euro, the dollar interest rate at 10%, and the euro interest rate at 5%?

Question

Quizplus · Accepted Answer

The expected dollar rate of return on euro deposits is calculated by considering the change in exchange rate and the euro interest rate. The expected exchange rate depreciation is (1.10 - 1.167) / 1.167 = -5.76%. Adding the euro interest rate of 5% gives an expected dollar return of -0.76%, approximately -1%.

What Is the Expected Dollar Rate of Return on Euro