The risk of an investment in a Eurodollar deposit is partially due to ________.
A) the fact that the center of the Eurodollar market is in London
B) the fact that the majority of these deposits are not in the form of U.S. dollars
C) the presence of some foreign exchange risk
D) the fact that these instruments only pay interest at maturity

Question

Quizplus · Accepted Answer

Eurodollar deposits are U.S. dollar-denominated deposits held in banks outside the United States, not necessarily in Europe. The risk associated with these deposits includes foreign exchange risk because while the deposits are in U.S. dollars, the investor may need to convert the returns into their local currency, exposing them to exchange rate fluctuations. The other options are incorrect: A) The location of the market does not inherently add risk; B) Eurodollar deposits are by definition in U.S. dollars; D) Eurodollar deposits can pay interest in various ways, not just at maturity.

The Risk of an Investment in a Eurodollar Deposit Is