Explanation:

The effective return is based on the forward premium on EUR relative to USD:

\text{Return} = \frac{F}{S} - 1 = \frac{1.2240}{1.1111} - 1 \approx 0.1016 = 10.16\%

So the nearest answer is 10.16%. The $500,000 amount does not change the percentage return.

Question 501.1. The current EURUSD spot exchange rate is `$1.11`11, and the one-year forward exchange rate is `$1.22`40; i.e., EUR is the base rate, and USD is the quote rate. If you convert `$500`,000 U.S. dollars to euros in the spot foreign exchange market and purchase a one-year forward contract to convert euros into dollars, which is nearest to the effective annual return?

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Last updated: April 18, 2026 at 11:32

-1.50%

0.0%

2.08%

0.0%

5.79%

10.16%

100.0%

Financial Risk Manager Part 1