In the Forex workshop (12Apr09), we had discussed against using the forward rate (F), as compared to the spot rate (S) in the denominator for calculating the depreciation/ appreciation of a currency, whereas some students had come up with an argument (duly supported by printed material) that ‘F’ instead of ‘S’ could be used. Well, neither side was wrong. BUT, repeat BUT, please be careful that you completely understand the logic of the argument/formula, and the way it is to be used.
For e.g., if INR per USD moves from INR 50 to INR 40 in one year, it means that as per the formula (F- S)/S, Rupee has appreciated (since the sign is ‘plus’) by 25%, being (50-40)/40 = 25%. However, if we change the denominator to F, we will get the depreciation (opposite movement) of USD – the foreign currency. That is, (F – S)/ F in case of direct quote, will give us the quantum of the opposite direction movement of the foreign currency – depreciation of 20% in the example we have just taken. You can cross-verify the tenability of this answer by converting the quotes into direct quotes for USD, and using the (F-S)/S formula and you will get to the same answer. This is a cool short cut, but make doubly sure you understand the logic.
Feel free to write to me if the above is not self-explanatory. Comments are anyways welcome.
April 22, 2009 at 9:50 pm |
Thanx for the clarity of abve
Regards
Ritesh