Question

Approximately what is the expected dollar rate of return on euro deposits if today's exchange rate is $1.18 per euro, next year's expected exchange rate is $1.10 per euro, and the euro interest rate is 5%?

Answer 1

Dollar rate of return = 15.5%

Step-by-step explanation:

The expected dollar rate would be the dollar equivalent of the future value of the Euro deposit converted at the exchange rate applicable in a years time .

The following steps would suffice

Step 1: Future value of 1 Euro

Future value of 1 Euro at 5% p.a = 1.05 Euro

Step 2: Dollar equivalent of the Euro future value

The Dollar equivalent of 1.05 Euro = 1.05× 1.10=1.155

Step 3: The Dollar rate of return

Dollar rate of return = Future value of deposit($)/initial deposit - 1

= (1.155/1) - 1 × 100

= 15.5%

Dollar rate of return = 15.5%