Assume that the Uncovered Interest Parity (UIP) holds. If the rate of retum on a euro asset is 8 percent and the rate of return on a comparable dollar asset is 4 percent, the expected rate of dollar depreciation must be

A. - 5 percent.

B. 4 percent.

C. - 3 percent.

D. - 4 percent.

D. - 4 percent.

Explanation:

Rate of return on Euro assets = 8%

Rate of return on Dollar assets = 4%

As per the Uncovered Interest Parity condition,

Expected rate of depreciation of the dollar

= Rate of return on Dollar assets - Rate of return on Euro assets

= 4% - 8%

= - 4%

Therefore, The expected rate of dollar depreciation must be - 4%.