The table below shows spot and forward rates for the U.S. Dollar and the South A

Question

The table below shows spot and forward rates for the U.S. Dollar and the South African Rand. Use the data in the table to answer questions that follow. On Tuesday, the spot price of the two currencies was: Rand. US$ - US$ Rand - From Tuesday to Wednesday, did the Rand appreciate or depreciate against the dollar? Explain your reasoning. On Tuesday, the 1-month forward Rand was at a [premium/discount] (circle one). This equals _______percentage change on an annual basis. On Wednesday, the 6-month forward Rand was at a [premium/discount] (circle one). This equals _______ % on an annual basis.

Explanation / Answer

1) Rand/U$ - 0.09482, U$/Rand = 1/0.09482 = 10.546

2) On Tuesday, 1 RAND = 0.09482, whereas on WEdnesday teh FX rate is higher. This implies that Rand has strengthened on Wednesday. So on a transaction basis, a buyer needs to pay more USD to get a fixed amount of Rand on Wednesday than on Thursday. So U$ is weaker and Rand is stronger on Wednesday.

3) Discount. On an annual basis this is 3.92% (=0.09451/0.09482-1 annualised)

4) Premium. Same as above.

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