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Answer: 10.16%
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.
Author: Manit Arora
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Question 501.1. The current EURUSD spot exchange rate is $1.1111, and the one-year forward exchange rate is $1.2240; 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?
A
-1.50%
B
2.08%
C
5.79%
D
10.16%
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