Question
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 retum 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.
Ask by Mitchell Simmons. in Saudi Arabia
Mar 09,2025
Upstudy AI Solution
Tutor-Verified Answer
Answer
The expected return on euro deposits in terms of dollars is 11%, and the expected return on dollar deposits in terms of euros is 1%.
Solution
To determine the expected return on euro deposits in terms of dollars and the expected return on dollar deposits in terms of euros, we need to consider the interest rates and the expected appreciation rate of the dollar.
Given:
- Interest rate on euro deposits = 7%
- Interest rate on dollar deposits = 5%
- Expected appreciation rate of the dollar = 4%
Let's calculate the expected return on euro deposits in terms of dollars and the expected return on dollar deposits in terms of euros.
1. Expected return on euro deposits in terms of dollars:
The expected return on euro deposits in terms of dollars can be calculated by adding the interest rate on euro deposits and the expected appreciation rate of the dollar.
Expected return on euro deposits in terms of dollars = 7% + 4% = 11%
Therefore, the expected return on euro deposits in terms of dollars is 11%.
2. Expected return on dollar deposits in terms of euros:
The expected return on dollar deposits in terms of euros can be calculated by adding the interest rate on dollar deposits and the expected depreciation rate of the dollar (which is the negative of the expected appreciation rate).
Expected return on dollar deposits in terms of euros = 5% - 4% = 1%
Therefore, the expected return on dollar deposits in terms of euros is 1%.
Based on the calculations:
- The expected return on euro deposits in terms of dollars is 11% (Option B).
- The expected return on dollar deposits in terms of euros is 1% (Option C).
Answered by UpStudy AI and reviewed by a Professional Tutor
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Let’s break this down in a fun way! When you look at the interest rates and the expected appreciation, you can see how they play together. The dollar deposits, with a 5% interest rate plus a 4% appreciation, give us an effective return of 9%. Meanwhile, euro deposits only offer a 7% interest. So, A) is correct; euro deposits indeed have a higher expected return than dollar deposits! Now, diving deeper into the options: calculating expected returns, C) also holds water. When you subtract the expected gains from euro deposits in terms of dollars (7% - 4% appreciation) from the dollar deposit’s appreciation, you get a return of 1%. That’s a catchy way to see how currencies interact!
