4) If the interest rate is 7 percent on euro deposits and 5 percent on dollar deposits, and if the dollar is expected to appreciate at a 4 percent rate, A) euro deposits have a higher expected return than dollar deposits. B) the expected return on euro deposits in terms of dollars is 11 percent. C) the expected return on dollar deposits in terms of euros is 1 percent. D) the expected return on euro deposits in terms of dollars is 3 percent. E) the expected return on dollar deposits equals the expected return on euro deposits.

When analyzing expected returns, it's essential to comprehend how currency appreciation impacts the effective return on foreign deposits. In this scenario, if the dollar appreciates at 4 percent while euro deposits yield 7 percent, you can determine the dollar-equivalent return. The effective return on euro deposits (in dollars) can be calculated as 7% (interest rate) + 4% (appreciation) = 11%. Moreover, for dollar deposits, when factoring in the relative value of the euro, you'll find that the effective return from dollar deposits, given the euro's lower interest rate, results in a minimal gain when converted back. This highlights the intricate dance between interest rates and currency shifts in international finance!