Calculation of Appreciation or

Depreciation of Currency |
Exchange Rate
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Forward premium or discount of a particular currency can be

calculated separately with respect to foreign currency and domestic
currency separately. The formulae and methods used are with respect
to direct quote mechanism.

A: Calculation of forward premium (appreciation) or

discount (depreciation) percentage with respect to foreign
currency:

If the calculated answer is positive, it means the foreign currency is at

premium, or vis-a-vis.

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B: Calculation of forward premium (appreciation) or

discount (depreciation) percentage with respect to local or
domestic currency:
If the calculated answer is positive, it means the local currency is at
discount, or vis-a-vis.

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For example, suppose the spot rate is Rs. 50 per dollar, and the one
year forward rate is Rs. 55 per dollar.

A: Work out the appreciation or depreciation of foreign

currency, i.e., US $:

Here, the calculated answer is in positive, 10%; it means that, foreign

currency, i.e., US $ is at premium at the rate of 10%, on an annualize
basis.

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B: Work out the appreciation or depreciation of local

currency, i.e., Indian Rupees:

Here, the calculated answer is in positive, 9.09%; it means that, local

currency, i.e., Indian Rupees is at discount at the rate of 9.09%, on an
annualize basis.

Illustration 1:
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Rs. 47.10 – 47.25 per dollar is a direct quote. Another direct quote is
¥/£ 1 79-180.

Answer:
(a) The country where the quote is made.
(b) The bid, ask and spread.
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(c) For the Ask price:

(i) Currency being bought by the bank,

(ii) Currency being bought by you

(d) For the Bid price

(i) Currency being bought by the bank

(ii) Currency being bought by you.

Solution:

Illustration 2:
The rate quoted by a Chennai banker is 70-72 per pound. Compute the
relevant pound per Re rate.

Solution:
Bid (Pound/Rs.) = 1/Ask (Rs./Pound) = 1/72 = 0.01388

Ask (Pound/Rs.) = 1 /Bid (Rs./Pound) = 1/70 = 0.01428

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The rate is 0.01388 – 0.01428

Illustration 3:
Consider the following Rupee/SGD direct quote of ICICI
Mumbai: 26.50 – 75:
a. What is the cost of buying Rs.55,000?

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b. How much would you receive by selling 92,000 rupees?

c. What is the cost of buying Sing $7,450?

d. What is your receipt if you sell Sing $18,340?

Solution:
a. Cost of Buying Rs.55,000:
i. This is direct quote for the Singapore dollar. Rs.26.50 is the bid rate
and Rs.26.75 is the ask rate.
ii. We want to buy Rs.55,000 i.e. the bank will have to sell Rs.55,000.
The relevant rate is the bank’s Ask rate for Rs.

iii. The quote for Rs. will be as under

Bid (S$/Rs.) = 1/Ask (Rs./S$) = 1/26.75 = 0.037383

Ask (S$/Rs.) = 1 /Bid (Rs./S$) = 1/26.50 = 0.037736

iv. The cost of buying Rupees 55,000 = Rs.55,000 × S$ 0.037736 = S$

2,075.48

v. Or, Simply, 55,000/26.50 = S $ 2,075.48

vi. Here, we are buying home currency; it means we sell foreign

currency to Bank, so bank will buy foreign currency. So bank will
apply bid rate.

b. Sell Rs. 92,000:

i. We want to sell Rs. Hence the bank will buy Rs. The relevant rate is
the Bid rate for Rs.

ii. The proceeds of selling Rs. 92,000 = Rs. 92,000 × S$ 0.037383 =

S$ 3,439.25

iii. Or, more simply, 92,000/26.75 = S$ 3,439.25

iv. Here, we are selling home currency; so it means we are buying

foreign currency from bank. So bank will apply ask rate.

c. Cost of Buying S $ 7,450:

 i. We want to buy S $. Hence the bank has to sell S $. Hence the
relevant rate is the Ask rate-

ii. Cost of buying S$ 7,450 = 7,450 × 26.75 = Rs.1,99,287.50

d. Receipt if we Sell S $ 18,340:

i. We want to sell S $. Hence the bank has to buy S $. Hence the
relevant rate is the Bid rate.

ii. Proceeds from selling S $ 18,340 = 18,340 × 26.50 = Rs.4,86,010

by Taboola
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Related Articles:
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2. Difference between Currency Depreciation and Currency Appreciation