Assume that the U.S. interest rate is 5%, the European interest rate is 2%, and the future expected exchange rate in one year is $1.224. If the spot rate is $1.16, then the expected dollar return on euro deposits is:
A) 7.52%
B) 5%
C) 3.2%
D) 2%

Question

Quizplus · Accepted Answer

The expected dollar return on euro deposits can be calculated using the formula: [(1 + foreign interest rate) * (expected future exchange rate / current spot rate)] - 1. Here, it translates to [(1 + 0.02) * (1.224 / 1.16)] - 1 = 0.0752 or 7.52%.

Assume That the U