What is the expected dollar rate of return on euro deposits

Reference no: EM133231982

Assignment:

What is the expected dollar rate of return on euro deposits if today's exchange rate is $1.20 per euro, next year's expected exchange rate is $1.212 per euro, the dollar interest rate is 6%, and the euro interest rate is 4%?

a. What is the expected dollar rate of return on euro deposits?

b. Does IP hold in this example?

c. What would happen to the S/E exchange rate? Will the euro appreciate or depreciate? How much?

d. Calculate the equilibrium S/E exchange rate assuming all other variables remain constant.

Reference no: EM133231982

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