Question

If the U.S. dollars give a 3% rate of return, and euro gives 4%. Suppose the current exchange rate 1 euro=1.2 dollars. And expected exchange rate 1.2 euro=1 dollar. Should you invest in U.S. dollars or euro?

Answer 1

You should invest in euros

Step-by-step explanation:

The euro is not only giving a higher rate of return (4% vs 3% for the U.S. dollar), but is is also expected to flip its exchange rate in respect to the dollar, going from 1 euro = 1.2 dollars to 1.2 euros = 1 dollar.

This means that while investing your dollars in euros will be a bit expensive at first because you will have to give more dollars for each euro, in the near future, when you obtain the return on your investment, the combined effect of a higher rate of return and a higher exchange rate for the euro will make you earn more than if you had invested in dollars.