Question
A European bank is thinking about shifting an amount A of its euro interbank deposit balances into dollar deposits, without incurring any risk from exchange
A European bank is thinking about shifting an amount A of its euro interbank deposit balances into dollar deposits, without incurring any risk from exchange rate fluctuations. Clearly, its decision will therefore depend on how the rate of return on euro deposits compares to the covered euro rate of return on dollar deposits. To calculate the latter (at a given dollar rate of return on dollar deposits and at given euro spot and forward prices of the dollar), how will it proceed? Give a step-by-step algebraic explanation, starting from an investible sum of A euros.
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