appreciation and depreciation of an exchange rate

6.2.4 Exchange Rates – Appreciation & Depreciation

What is an Exchange Rate?

An exchange rate tells you how many units of one currency you get for one unit of another. For example, if the rate is 1 USD = 0.85 EUR, you get 0.85 € for every $1.

Appreciation vs. Depreciation

Think of a currency like a price tag on a product.

• Appreciation – the price tag goes down for the foreign currency, meaning you get more of it for the same amount of your home currency.
• Depreciation – the price tag goes up, meaning you get less of the foreign currency.

📈 If 1 USD = 0.80 EUR today and 1 USD = 0.90 EUR tomorrow, the dollar has appreciated against the euro.

Calculating the Change

Use the formula:

ΔRate = NewRate – OldRate

Then, to find the percentage change:

%Change = (ΔRate ÷ OldRate) × 100%

Example:

1. Old rate: 1 USD = 0.80 EUR
2. New rate: 1 USD = 0.90 EUR
3. ΔRate = 0.90 – 0.80 = 0.10 EUR
4. %Change = (0.10 ÷ 0.80) × 100% = 12.5% appreciation

Real‑World Analogy

Imagine you’re buying a video game in a foreign country. - If the game costs $50 in your country and €40 abroad, the euro is appreciated (you need fewer euros to buy the same game). - If the game costs $50 and €60 abroad, the euro is depreciated (you need more euros).

Exam Tip Box

Practice Table

Key Takeaways

• Appreciation = you get more foreign currency for the same amount of home currency.
• Depreciation = you get less foreign currency.
• Use ΔRate = New – Old and %Change = (ΔRate ÷ Old) × 100% for calculations.
• Remember the old rate as the denominator in percentage calculations.

Exam Question Example

“The exchange rate between the British pound and the US dollar changed from 1 £ = 1.30 USD to 1 £ = 1.45 USD over a month. Calculate the percentage change in the rate.”

Answer: ΔRate = 1.45 – 1.30 = 0.15 USD. %Change = (0.15 ÷ 1.30) × 100% ≈ 11.54% appreciation.