Question

Suppose that a country's currency is worth 5.1 units of foreign currency today, and is expected to be worth 5.5 units in one year. What is the expected appreciation in this currency? (Percentage points; Round to one decimal place.)

Answer 1

Ok, let me take you through it with very easy steps:


Let us assume the currency of domestic country be 'D'

and assume the currency of foreign country be 'F'

As given in the question:

Today's exchange rate is D 1 = F 5.1

Expected exchange rate in one year is D 1 = F 5.5

We can see that D is appreciating against F, as D's purchasing power is increasing. Today every unit of D can purchase just 5.1 units of F, but after a year, every unit of D wil be able to purchase 5.5 units of F.

The value of appreciation is F 5.5 minus F 5.1 = F 0.4

This appreciation can be expressed in percentage, as calculated below:

(Value of appreciation / original value today x 100)

After putting the values in above, we get:

0.4 / 5.1 x 100 = 7.84%

When it's rounded to one decimal place, we get the below:

The % appreciation of domestic currency = 7.8%