If the interest rate is 7 percent on eurodenominated assets

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________-denominated assets in ________ percent. (please give the explanation or calculation)

A) dollar; euros is 3

B) euro; dollars is 1

C) dollar; euros is 1

D) euro; dollars is 3

Solution

Euro, in dollars is 1% because euro will give 5% returns but we have to subtract 4% because now euros depreciated by 4% W. R. T dollar