5. Suppose the current spot exchange rate is $1.17 to €1. The dollar is expected to appreciate to $1.11 to €1 during the next year. (Assume inflation and risk etc. are the same between the Eurozone and the U.S.)

(a) What is the expected currency appreciation gain for the dollar? (Give this as a percentage and round to the nearest 0.1%.)

(b) Suppose the interest rate on 1-year corporate bonds in the U.S. is 4%. What is the expected total return for Eurozone investors who buy dollar bonds now? (Give this as a percentage, round to the nearest 0.1%, and use our total return approximation.)

Answer rating: 100% (QA)

a To calculate the expected currency appreciation gain for the dollar we use the formula Curren... View the full answer