Question asks what the return is on a one year carry trade with EUR. Answer is B, 1065. The explanation they give is that you convert EUR to USD, then USD to DRN, invest the DRN and convert back to EUR.
But if you only convert from EUR to USD and invest the USD, I calculate a return of 1789.
What’s the deal?
This is really a bad question.
You are not obligated to use EUR/DRN pair for carry trade. If you use EUR/USD pair, you will make less money. I don’t think you will have time to do both in the exam.
For you question, USD will give you
On EUR side: -100,000 x 1.008 + USD side [100,000/0.8065] * 1.009 * 0.82 = 101,774 Euro
Bump - this Q is now in the topic tests … why is using usd eur pairing not the right way to go?!