The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-Suppose a Japanese investor purchases a dollar deposit that yields 5 percent interest at the end of a year. What will be the approximate return in terms of yen at maturity if the exchange rate moves from $1 = ¥100 to $1 = ¥105 during the year?
A)1 percent
B)5 percent
C)10 percent
D)20 percent
E)0 percent

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Suppose a Japanese investor purchases a dollar deposit that yields 5 percent interest at the end of a year. What will be the approximate return in terms of yen at maturity if the exchange rate moves from $1 = ¥100 to $1 = ¥105 during the year?
A)1 percent 
B)5 percent 
C)10 percent 
D)20 percent 
E)0 percent

Quizplus · Accepted Answer

The Japanese investor is investing in dollars, so they will receive their return in dollars. However, since the exchange rate has changed during the year, the amount of yen they will receive when they convert their dollars back into yen will depend on the exchange rate at the end of the year.

If the exchange rate at the end of the year is $1 = ¥105, then the investor will receive ¥105 for each dollar they earned in interest.

Assuming that the interest rate is compounded annually, the total return in terms of yen will be:

1.05 x ¥100 = ¥105

Therefore, the approximate return in terms of yen is 10 percent.

The Figure Given Below Depicts the Foreign Exchange Market for British