Question

In which market would you recommend investing an American if the current exchange rate (spot) is $ 1.10 / euro, the expected exchange rate (expected spot) for next year is $ 1.166 / euro, the dollar interest rate is 10%, and the interest rate on the euro is 4%?

Select one:

A) stay in your market
B) in the european market

Answer 1

Answer:B) in the european market

As the amount after 1 year is higher if invested in European market it is better to Choose Option(2)

Let us consider we have $100 for Investing.

Current Exchange Rate (spot) is $ 1.10 / euro

Dollar interest rate = 10%

Interest rate on the euro = 4%

A) Stay in your market

Invest amount available for Investment in America(dollar)

Amount after 1 Year = $100 (1+0.10)

Amount after 1 Year = $100 *1.1

Amount after 1 Year = $110

B) in the european market

Convert amount available for Investment to Euros and Invest in Euro

Amount Converted to Euro = $100/$1.1 = Euro 90.01

Invest Euros so received for 1 year

Amount after 1 Year = Euro90.91 (1+0.04)

Amount after 1 Year = Euro94.55

Amount reconverted to Dollar = Euro94.55 * $1.166/Euro

Amount reconverted to Dollar = $110.24