Calculate the dollar rate of return on a 10,000 pound sterling deposit in a London bank in a year when the interest rate on pounds is 5 percent and the dollar/pound exchange rate moves from $1.65 per pound to $1.51 per pound.

Answer is given below.

Explanation:

There were 10,000 pounds were invested which was worth 10,000 * $1.65 = $16500 dollars

10,000 after 1 year becomes 10,500 with 5% rate of interest.

Now exchange rate is 1.51 euro / per dollar which makes 10,500 euros is worth 10,500 * 1.51 = $15,855.

Rate of return = [ ($15,855 - $16500) / $16500] * 100 = 3.9%

8.48%

Explanation:

First we calculate the future value of the investment of 10,000 pound invested at an interest rate of 5% for one year.

Future value = 10000 (1+0.05) ^1

Future Value = 10,500.

Now converting that into dollar:

At $1.65 per pound = $17,325

At $1.51 per pound = $15,855

Hence the dollar has gained its value against the pound sterling by almost 8.5%.

Good luck and cheers.