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Economics_SL7

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									            Economics

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Sub: Economics                                                                         Topic: Micro Economics

Question:

Annual percentage discount or premium




The table above shows the 90-day forward rate on the South African rand.

   a. Is the dollar at a forward discount or premium on the rand?

   b. What is the annual percentage discount or premium?

   c. If you have no other information about the two currencies, what is your best guess about
        the spot rate on the rand three months hence?

   d. Suppose that you expect to receive 100,000 rand in three months. How many dollars is
        this likely to be worth?


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 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
                              submitting the same in lieu of their academic submissions for grades.
Sub: Economics                                                                         Topic: Micro Economics



a. $ is at a forward premium on the Rand as the Forward rates are appreciating.



b. Annual Premium on $ = F-S/S * 100.
   Since we have to calculate the annual premium, we use the 3 m forward rates.

   Annual Premium = (6.5917 – 6.4662) / 6.4662 * 100 * 12/3 = 7.763%




c. In the absence of any other information, we assume pure expectations theory holds good. This
   means that the Forward rate 3 month hence will materialize as the spot rate. So, Spot rate 3
   months hence = Rand 6.5917 / $



d. We are about to receive 100000 rand in 3 months. We will use the 3 month Forward rates to find
   out the $ equivalent. So, $ equivalent = 100000/6.5917 = $ 15170.6




                           www.classof1.com/homework-help/economics
 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
                              submitting the same in lieu of their academic submissions for grades.
Sub: Economics                                                                         Topic: Micro Economics

Solution:




                                              ** End of the Solution **




                           www.classof1.com/homework-help/economics
 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
                              submitting the same in lieu of their academic submissions for grades.
Sub: Economics                                                                          Topic: Micro Economics

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