1 *** What is the expected dollar rate of return on euro deposits with today's exchange rate at $1.10 per euro, next year's expected exchange rate at $1.166 per euro, the dollar interest rate at 10%, and the euro interest rate at 5%? C) -1% B) 11% D) 0% E) 15% O A) 10% 2 ** If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then an investor should C) be indifferent between dollars and euros. E) invest only in euros if the exchange rate is expected to remain constant. D) invest only in dollars if the exchange rate is expected to remain constant. A) invest only in dollars. B) invest only in euros. 3 ** Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro. Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar deposits is 10 percent and on euro it is 4 percent. Under these assumptions, C) it is hard to tell whether interest parity does or does not hold. E) interest parity fluctuates. A) interest parity does not hold. B) interest parity does hold. D) Not enough information is given to answer the question. 4 Which one of the following statements is the most accurate? E) A rise in the interest rate offered by the dollar causes the euro to appreciate. B) A rise in the interest rate offered by dollar deposits causes the dollar to depreciate. A) A rise in the interest rate offered by dollar deposits causes the dollar to appreciate. C) A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar. D) For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate.