Exchange Rate Risk In the late 1990s,many East Asian currencies suddenly and dramatically devalued.What is the percentage change in value of a $75 million investment in Indonesia when the exchange rate changes from $1 = 1,000 rupiah to $1 = 7,000 rupiah?

Question

Quizplus · Accepted Answer

To find the percentage change, we need to calculate the difference between the initial value and the final value, divide it by the initial value, and then multiply by 100.

Initially, $75 million = 75 million x 1,000 rupiah = 75 billion rupiah.

After the devaluation, $75 million = 75 million x 7,000 rupiah = 525 billion rupiah.

The difference is 525 billion - 75 billion = 450 billion rupiah.

The percentage change is (450 billion/75 billion) x 100 = 600%.

However, this is the increase in rupiah value, and we want to know the decrease in dollar value.

Since we started with $75 million and ended up with $75 million, there is no change in dollar value.

Therefore, the percentage change in value of the investment is equal to the percentage change in the exchange rate, which is (7,000-1,000)/1,000 x 100 = 600%.

But this is the increase in rupiah per dollar, so the decrease in dollar value is 100/6 = 16.67%.

Therefore, the answer is B) 85.71 percent (100% - 16.67% = 85.71%).

Exchange Rate Risk in the Late 1990s,many East Asian Currencies