Assume that the current euro-dollar exchange rate (E$/€) is $1.10 per euro. Further suppose that the dollar interest rate (R$) is 10 percent and the euro interest rate (R€) is 5 percent. You expect that the exchange rate (Ee$/€) would be $1.165 per euro in a year and that you have $1,000,000 to invest in either a dollar or a euro denominated asset. Calculate the dollar rate of return of either asset. Which of these deposits offer the higher dollar rate of return and why? We have a number of assumptions including that 1. We assume perfect capital mobility meaning that investors can invest in either dollar-denominated assets or euro-denominated assets. 2. International investments and capital flow are free of costs. 3. We further assume that taxes are uniform across countries. The dollar-denominated asset (for example, the U.S. government security) offers 10% rate of return . What will be the expected dollar return on euro-denominated asset?
Assume that the current euro-dollar exchange rate (E$/€) is $1.10 per euro. Further suppose that the dollar interest rate (R$) is 10 percent and the euro interest rate (R€) is 5 percent. You expect that the exchange rate (Ee$/€) would be $1.165 per euro in a year and that you have $1,000,000 to invest in either a dollar or a euro denominated asset. Calculate the dollar rate of return of either asset. Which of these deposits offer the higher dollar rate of return and why? We have a number of assumptions including that 1. We assume perfect capital mobility meaning that investors can invest in either dollar-denominated assets or euro-denominated assets. 2. International investments and capital flow are free of costs. 3. We further assume that taxes are uniform across countries. The dollar-denominated asset (for example, the U.S. government security) offers 10% rate of return . What will be the expected dollar return on euro-denominated asset?
