Can someone please explain this (1 Viewer)

[ishanik]

Was reading in the Dixon textbook about appreciation and depreciation and was unable to understand the following:

-an appreciation decreases the interest servicing cost on foreign debt
-an appreciation will reduce the $A value of foreign debt that has been borrowed
-a depreciation increases the $A value of foreign income earned on Australia's investment
-a depreciation increases the value of foreign assets in Australian dollar terms

can someone please explain what they mean.

Thank you

 

[RivalryofTroll]

An appreciation means that the price of the AUD would increase relative to the price of foreign currency.

In simple terms,
--> That means that we need to convert less AUD for an X amount of foreign currency. So this means we need to convert less AUD for interest servicing costs on FOREIGN DEBT --> thus, decreasing the interest servicing cost on foreign debt.

--> Similar concept for point 2.

A depreciation means that the price of the AUD decreases relative to the price of foreign currency.

--> So this means that if we're converting from foreign currency (earned on AU's investment) to AUD, we'd get more $A from the same X amount of foreign currency (since a depreciation implies that we'd need to convert more AUD for an X amount of foreign currency).
Thus, a depreciation increases the value of foreign income earned on AU's investment in $A terms.

--> In the 4th point case, a depreciation would lead to us having to convert more AUD to reach an X amount of foreign currency (needed for the asset) so this means that the value of foreign assets in AUD ($A) terms would rise.

(Sorry if the wording is a bit confusing )

 

[Examine]

-an appreciation decreases the interest servicing cost on foreign debt
If the $A appreciates it means that Australia's interest repayments on foreign debt decreases due to the decreased value of foreign currency.

Look at it this way. Imagine that I owed someone in America $1000 USD in interest repayments. The current exchange rate is $1AUD=$1USD. Right now I'll have to pay $1000AUD to satisfy my interest repayments. If the AUD were to appreciate so that $1AUD=$1.1USD, then I will only need to pay $909AUD to repay the $1000USD.

-an appreciation will reduce the $A value of foreign debt that has been borrowed
Same as above though the foreign debt has decreased in value.

-a depreciation increases the $A value of foreign income earned on Australia's investment
If the $A decreases in value means an increase in the value of the foreign currency, and therefore as the value of foreign currency increases so does the income that domestic investors make.

So someone owes me $1000USD. The exchange rate is currently at $1AUD=$1USD. If the value of the AUD were to depreciate so that $1AUD=$0.9USD, then instead of paying $1000AUD like they were if it was before, they would now have to pay $1111AUD to make up the $1000USD.

-a depreciation increases the value of foreign assets in Australian dollar terms
If the foreign currency increases against Australia's currency (where in this situation is depreciating), the value of foreign assets increases. Similar reason as the example above.

 

[Examine]

An appreciation means that the price of the AUD would increase relative to the price of foreign currency.

In simple terms,
--> That means that we need to convert less AUD for an X amount of foreign currency. So this means we need to convert less AUD for interest servicing costs on FOREIGN DEBT --> thus, decreasing the interest servicing cost on foreign debt.

--> Similar concept for point 2.

A depreciation means that the price of the AUD decreases relative to the price of foreign currency.

--> So this means that if we're converting from foreign currency (earned on AU's investment) to AUD, we'd get more $A from the same X amount of foreign currency (since a depreciation implies that we'd need to convert more AUD for an X amount of foreign currency).
Thus, a depreciation increases the value of foreign income earned on AU's investment in $A terms.

--> In the 4th point case, a depreciation would lead to us having to convert more AUD to reach an X amount of foreign currency (needed for the asset) so this means that the value of foreign assets in AUD ($A) terms would rise.

(Sorry if the wording is a bit confusing )

beaten hahahah

 

[RivalryofTroll]

-an appreciation decreases the interest servicing cost on foreign debt
If the $A appreciates it means that Australia's interest repayments on foreign debt decreases due to the decreased value of foreign currency.

Look at it this way. Imagine that I owed someone in America $1000 USD. The current exchange rate is $1AUD=$1USD. Right now I'll have to pay $1000AUD to satisfy my interest repayments. If the AUD were to appreciate so that $1AUD=$1.1USD, then I will only need to pay $909AUD to repay the $1000USD.

-an appreciation will reduce the $A value of foreign debt that has been borrowed
Same as above though the foreign debt has decreased in value.

-a depreciation increases the $A value of foreign income earned on Australia's investment
If the $A decreases in value means an increase in the value of the foreign currency, and therefore as the value of foreign currency increases so does the income that domestic investors make.

So someone owes me $1000USD. The exchange rate is currently at $1AUD=$1USD. If the value of the AUD were to depreciate so that $1AUD=$0.9USD, then instead of paying $1000AUD like they were if it was before, they would now have to pay $1111AUD to make up the $1000USD.

-a depreciation increases the value of foreign assets in Australian dollar terms
If the foreign currency increases against Australia's currency (where in this situation is depreciating), the value of foreign assets increases. Similar reason as the example above.

Yeah, this is probably clearer

 

[ishanik]

Examine, thank you so much for your effort in explaining this to me! Now this concept is much clearer and i finally get it! YAH! Thanks alot guys