Based on the table, the appreciation of which of the following currencies is most likely to occur?
A. The US dollar against the euro by 3.38%
B. The euro against the US dollar by 3.50%
C. The British pound against the US dollar by 2.00%
Answer (2)
To determine which currency appreciation is most likely to occur based on the given spot rates, we need to calculate the percentage changes for each currency.
US Dollar against the Euro:
Initial Spot Rate (USD/EUR): 1.3001
Expected Spot Rate in One Year (USD/EUR): 1.3456
The US dollar depreciates against the euro if the USD/EUR rate increases (as it takes more dollars to buy one euro).
The percentage change is calculated as follows:
Percentage Change = Initial Spot Rate Expected Spot Rate − Initial Spot Rate × 100
= 1.3001 1.3456 − 1.3001 × 100 ≈ 3.50%
This indicates the euro appreciates against the US dollar by approximately 3.50%.
Euro against the US Dollar:
Calculated as above, the euro appreciation against the US dollar is 3.50%. This corresponds to option B: B. The euro against the US dollar by 3.50% .
British Pound against the US Dollar:
Initial Spot Rate (USD/GBP): 1.5805
Expected Spot Rate in One Year (USD/GBP): 1.5489
The British pound appreciates against the US dollar if the USD/GBP rate decreases (as it takes fewer dollars to buy one British pound).
The percentage change is calculated as follows:
= 1.5805 1.5489 − 1.5805 × 100 ≈ − 2.00%
This indicates the US dollar appreciates against the British pound by approximately 2.00%.
Based on the calculations, the currency appreciation that is most likely to occur is option B, the euro against the US dollar by 3.50%. This is because the calculated percentage change is positive, indicating an appreciation, and is the largest magnitude among the given options.
The euro against the US dollar is expected to appreciate by 3.50%, which is the highest percentage among the given options. Therefore, the most likely currency appreciation is option B. This means that the euro will gain value relative to the US dollar more than the other currencies listed.
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