Question

In: Finance

The U.S. dollar suddenly changes un value against the euro moving from an exchange rate of...

The U.S. dollar suddenly changes un value against the euro moving from an exchange rate of $0.8909/euro to $0.8709/euro. Thus, the dollar has ____ by ____.

A) appreciated; 2.30%

B) appreciated; 2.24%

I have one souce giving me A) and another giving me B).

Which one is the correct answer?

Why is it calculated that way and not the other way around?

Expert Solution

I will explain you the correct method of calculating currency change i.e appreciation or depreciation

Since the change in dollar has to be calculated, so it will has to be base currency. But quotes given in question have Euro as base currency.

Old rate = $0.8909 / Euro and New rate = $0.8709 / Euro

Now changing the base currency to Dollar, we get

Old rate = (1/0.8909) = Euro1.122460 / $

New rate = (1/0.8709) = Euro1.148237 / $

Since with old rate 1.22460 Euros can brought for a dollar. However with new rate 1.148237 Euros can be brought from a dollar. So a dollar can be used to buy more number of Euros as rates changes. So dollar has appreciated.

To find change in dollar, we will have to find the change in number of euros that can be brought for a dollar.

Change in dollar(appreciation or depreciation) = (New rate / Old rate) -1 = (1.148237 / 1.122460) - 1 = 1.0229647 - 1 = 0.0229647 = 2.29647% = 2.30%

We can also see since the change is a positive percentage, so dollar has appreciated.

Hence, Answer: Appreciated by 2.30%

jeff jeffy answered 1 day ago

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