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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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CURRENCY APPRECIATION Suppose that 1 Danish krone could be purchased in the foreign exchange market today for $0.15. If the krone appreciated 4% tomorrow against the dollar, how many krones would a dollar buy tomorrow?

Summary Introduction

To determine: The exchange rate of US dollar in terms of krone.

Introduction:

Currency Appreciation:

It indicates the positive (increase) change in the currency’s value in reference to any other currency. The changes in the currency value may be due to some factors such as change in government policies, and fluctuation in interest rates.

Exchange Rate:

The rate, which indicates the conversion rate for a country’s currency and that can be got in exchange of a currency of another country, is an exchange rate.

Explanation

Given information:

The exchange rate of 1 Danish krone in terms of US dollar is $0.15.

The appreciation in krone in reference of US dollar is 4% or 0.04.

Firstly, calculate the appreciation in krone to compute the increased value (appreciated value) of krone.

Formula to calculate the appreciation in krone with reference of US dollar,

Appreciation in krone=Exchange rate of krone×Appreciation percentage

Substitute $0.15 for exchange rate of 1 krone in US dollar, and 0.04 for appreciation percentage in the above formula.

Appreciation in krone=$0.15×0.04=$0.006

Formula to calculate the new exchange rate of krone,

Appreciated exchange rate of krone=Old exchange rate of krone+Appreciation

Substitute $0

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