What component of the rate of return arises from the percentage change in the value of the interest payments due to the change in the exchange rate?

Consider the following data collected on February 9, 2004. The interest rate given is for a one-year money market deposit. The spot exchange rate is the rate for February 9. The expected exchange rate is the one-year forward rate. Express each answer as a percentage.

iE 4.5%
E8/£ 1.8574 $/£
E08/£ 1.7956 $/£

a. Use both RoR formulas to calculate the expected rate of return on the British money market deposit how that both formulas generate the same answer.

b. What part of the rate of return arises only due to the interest earned on the deposit?

c. What part of the rate of return arises from the percentage change in the value of the principal due to the change in the exchange rate?

d. What component of the rate of return arises from the percentage change in the value of the interest payments due to the change in the exchange rate?

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