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What is the expected return on the dollar investment

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Reference no: EM133072522

Suppose that the annual interest rate on a dollar account in the U.S. is 4%, the interest rate on a euro account in Europe is 6%. The expected future exchange rate in dollars per euro is 1.2 and the current spot rate is 1.25 dollars per euro. You are considering putting your money in a USD account in the U.S. versus in a Euro account in Europe. Use the approximate uncovered interest parity condition to answer the below questions.

i) What is the expected return on the dollar investment?

ii) What is the expected return on the euro investment?

iii) Does the UIP hold?

iv) At what spot rate will the UIP hold?

Reference no: EM133072522

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