Question

An exchange rate between two currencies has increased to 1.4500. If the base currency has appreciated by 8% against the quote currency, the initial exchange rate (the old rate) was closest to?

a) 1.3435
b) 1.3438
c) 1.3442
d) 1.3447

Answer 1

To find the initial exchange rate, divide the increased exchange rate by 1 plus the percentage appreciation of the base currency. In this case, the initial exchange rate (the old rate) closest to 1.4500, after an 8% appreciation, is 1.3435.

Step-by-step explanation:

To find the initial exchange rate (the old rate), we need to divide the increased exchange rate by 1 plus the percentage appreciation of the base currency. In this case, the base currency has appreciated by 8% against the quote currency. So, we divide 1.4500 by 1.08 to find the initial exchange rate:

Initial exchange rate = 1.4500 / 1.08 = 1.3426

Therefore, the initial exchange rate (the old rate) was closest to 1.3435 (option a).