Interest rate on Euro
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Assume that one year offshore USD and EURO interest rates in London are 4.6%-5.00% and 3.00%-3.4% respectively. A German investor has access to the following spot rates:
EUR/USD 1.2280-1.2295
The German investor with EUR 10,000,000 decides to take advantage of dollar interest rates. He/She converts Euros into USD and deposits it in the bank at 4.6% per annum interest. When the German investor withdraws its USD funds after one year, find out that the spot rates are as follows:
EUR/USD 1.1590-1.1595
What rate of return would the German investor earn on its EUR10,000,000 in Euro terms?
a) 4.6%
b) 3.4%
c) 10.78%
d) 10.96%
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Solution Summary
This solution calculates interest rate in Euro terms after converting Euros into dollars, investing dollars and converting back dollars into Euros at the end of 1 year with step-by-step calculations and explanations in an excel file.
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