Question

1. On January 1, 1975, the Mexican peso/U.S.$ exchange rate was Ps 12.5 = $1. By 1985, the exchange rate stood at Ps 208.9 = $1.

a. Are these direct or indirect quotes?

b. By how much did the Mexican peso appreciate or depreciate against the dollar over this 10-year period?

c. By how much did the dollar appreciate or depreciate against the peso over this period?

2. In the second half of 1997, the Indonesian rupiah depreciated by 84% against the U.S. dollar. By how much did the dollar appreciate against the rupiah?

Answer 1

1.

a. A direct quote is the price of foreign currency in domestic currency

Direct quote between the U.S. dollar and the Mexican peso, where the United States is designated as the home country

Ps 208.9 = $1 is direct quote

b. Over this 10-year period, the peso's dollar value has fallen from $0.08 (1/12.5) to $0.004787 (1/208.9).

This change in dollar value is equivalent to a peso devaluation of 94.02% ((0.004787 - 0.08)/0.08).

c. Over the 10 year period dollar appreciated i.e, Ps 12.5 = $1 in 1975 to Ps 208.9 = $1 in 1985

Appreciation = (208.9-12.5)/12.5 = 1571.20%

2.

Let exchange rate of Rupiah E
Net exchange rate after decrease of exchange rate =E*(1-84%) =0.16E

Dollar appreciated against the Rupiah =(1/Exchange rate before decrease-1/Exchange rate after decrease)/(1/exchange rate before decrease)

Dollar appreciated against the Rupiah =(1/0.16 E-1/E)/(1/E)

Dollar appreciated against the Rupiah = 5.25 or 525%

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