Default risk and no transactions to prevent exchange rate

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Reference no: EM13853897

Assume the return on a 1 year domestic bank CD equals 3%. The return on a 1 year European bank CD equals 5%. Assume there is no default risk and no other transactions to prevent exchange rate risk. If the euro is expected to depreciate by 4%, a saver will maximize her return by saving in:

A. The US bank CD.

B. The European bank CD.

Reference no: EM13853897

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