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Rasek [7]
3 years ago
6

Suppose that the annual rate of returns on dollar deposits equals 2% and the rate of return on euro deposits is 1%. Furthermore,

assume that expected exchange rate in a year is $1.1=1 euro and the current exchange rate is $1.08=1 euro. Should you invest in dollar deposits or euro deposits?
Business
1 answer:
Oliga [24]3 years ago
5 0

Answer:

I should invest in dollar deposits.

Explanation:

Current exchange rate is 1 euro = $1.08

Assuming I have y euro, the equivalent in dollar is $1.08y

Rate of return on dollar deposit = 2% = 0.02

Return on investment = $1.08y + (0.02 × $1.08y) = $1.08y + $0.0216y = $1.1016y

Rate of return on euro deposit = 1% = 0.01

Return on investment = y euro + (0.01 × y euro) = y euro + 0.01 y euro = 1.01y euro = 1.01y × $1.08 = $1.0908y

I should invest in dollar deposits because the return on investment is greater than euro deposits.

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