forex

Save Share

This query is : Resolved

anurag (Querist)

13 December 2010 In case of appreciation or depreciation of a currency , in which currency adjustment is to be made i.e. in same currency which is appreciated/depreciated or in opposite currency
for eg:
Q. $1=200rubles.find new exchange rate if
(1)value of rubles is appreciated by 10%
(2)value of rubles is depreciated by 10%
(3)value of dollar is appreciated by 10%
(4)value of dollar is depreciated by 10%
SOLUTION A=reverse adjustment is made in same currency
(1)$1=R200-10%
$1=R180
(2)$1=R200+10%
$1=R220
(3)$1-10%=R200
$0.9=R200
(4)$1+10%=R200
$1.1=R200
or,
SOLUTION B=given adjustment is made in opposite currency
(1)$1+10%=R200
$1.1=R200
(2)$1-10%=R200
$0.9=R200
(3)$1=R200+10%
$1=R220
(4)$1=R200-10%
$1=R180

which solution is correct and why? plz give ur advice.
i am confused that in which currency effect should be given i.e, in same currency or opposite currency or in home currency?
regards

anurag

anurag (Querist)

14 December 2010 Plz reply fast

anurag

anurag (Querist)

14 December 2010 Plz reply

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

25 July 2024 When dealing with foreign exchange rate adjustments due to currency appreciation or depreciation, it's important to understand where the adjustment should be reflected: in the same currency pair or in the home currency. Here’s a breakdown to clarify:

### Understanding Currency Appreciation and Depreciation

1. **Currency Appreciation**: This occurs when a currency's value increases relative to another currency. For example, if the value of rubles appreciates against the US dollar, it means that fewer rubles are required to buy one dollar.

2. **Currency Depreciation**: This occurs when a currency's value decreases relative to another currency. For instance, if the value of rubles depreciates against the US dollar, it means that more rubles are needed to purchase one dollar.

### Correct Approach for Adjustments

To determine how adjustments should be made:

- **Same Currency Adjustment**: Adjustments due to changes in the value of a currency (appreciation or depreciation) are typically made within the same currency pair. For instance, if the ruble appreciates against the dollar, the adjustment would reflect how many rubles are needed per dollar after the appreciation.

- **Opposite Currency Adjustment**: This approach isn't typically used because it would imply adjusting the rate of the opposite currency instead of reflecting the change in the currency's own value.

### Example Analysis

Let's clarify based on your examples:

1. **Appreciation of Rubles by 10%**:
- Current rate: $1 = R200
- After appreciation: $1 = R180 (10% less rubles required per dollar)

2. **Depreciation of Rubles by 10%**:
- Current rate: $1 = R200
- After depreciation: $1 = R220 (10% more rubles required per dollar)

3. **Appreciation of Dollar by 10%**:
- Current rate: $1 = R200
- After appreciation: $1 = R220 (10% more rubles required per dollar)

4. **Depreciation of Dollar by 10%**:
- Current rate: $1 = R200
- After depreciation: $1 = R180 (10% less rubles required per dollar)

### Conclusion

The correct approach is **Solution A**, where adjustments are made in the same currency pair that is experiencing appreciation or depreciation. This method reflects the change in the value of the currency relative to the other currency in the pair. Adjusting in the opposite currency (Solution B) would be incorrect because it does not reflect the actual change in the value of the currency in question.

Therefore, when calculating the new exchange rate after currency appreciation or depreciation, always adjust the rate in the same currency pair where the change occurred. This approach ensures accuracy and consistency in foreign exchange rate adjustments.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now