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FOREX

sristi srivastava (COST ACCOUNTANT) (113 Points)

11 January 2010

"APPRECIATION OF ONE CURRENCY IS EQUAL TO DEPRECIATION OF ANOTHER CURRENCY"

CAN ANYONE HELP ME ON THIS.

PLZ QUOTE AN EXAMPLE IT WOULD BE NICE.

THANX

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5 Replies

Rahul (CA Practice ) (1818 Points)
Replied 11 January 2010

Let me see if im able to clear you with example.

Suppose you can buy a reynold pen with Rs.8. Equation would be

1Pen=Rs.8

After 10 days pen becomes expensive. Now equation is

1Pen=Rs. 10

What is happening here is For a pen which u can buy earlier at Rs. 8 now you have to pay Rs. 10.

It means Value of Rs. Down because you have to pay more Rs. for a same unit and Value of Pen rise because you have to pay Rs.2 Extra for the same pen.

Now replace pen with Dollar.

I dont know whether it is right but i had understood this concept in the same manner.

CA Radhika Arde (Chartered Accountant) (67 Points)
Replied 11 January 2010

It is important to note that the value of a currency is always given in terms of another currency. Thus the value of a US dollar in terms of indian Rs is the Rs/$ exchange rate. The value of the Indian Rs. in terms of dollar is the $/Rs. exchange rate.

Currency appreciation - a currency appreciates with respect to another when its value rises in terms of the other. The dollar appreciates with respect to the rupees if the Rs/$ exchange rate rises.

Currency depreciation - a currency depreciates with respect to another when its value falls in terms of the other. The dollar depreciates with respect to the yen if the Rs/$ exchange rate falls.

Note that if the Rs./$ rate rises, then its reciprocal, the $/Rs rate falls. Since the $/Rs rate represents the value of the rupees in terms of dollars, this means that when the dollar appreciates with respect to the rupees, the rupees must depreciate with respect to the dollar.