Question

The south african rand was quoted on the spot international foreign exchange market was rand 8.8750 $ whilst the 3 month foward was quoted as rand 8.9865 $.

a. which currency is trading at a foward premium/discount?
b. Calculate the foward premium or discount per cent a)three month b0 annum on the dollar and on the rand

Answer 1

The South African rand is trading at a forward premium. The forward premium on the rand is approximately 1.258% for a three-month period.

Step-by-step explanation:

To determine which currency is trading at a forward premium or discount, we compare the spot exchange rate with the forward exchange rate. In this case, the spot exchange rate for the South African rand is rand 8.8750 to $1, while the 3-month forward exchange rate is rand 8.9865 to $1. The forward exchange rate is higher than the spot exchange rate, indicating that the rand is trading at a forward premium.

To calculate the forward premium or discount, we need to calculate the difference between the forward and spot exchange rates and then convert it into a percentage. In this case, the difference is rand 8.9865 - rand 8.8750 = rand 0.1115. To calculate the percentage, we divide the difference by the spot exchange rate and multiply by 100: (rand 0.1115 / rand 8.8750) * 100 = 1.258%. Therefore, the forward premium on the rand is approximately 1.258% for a three-month period.