On 20 May 2016, the spot and forward rates between the rand and the USD(ZAR/USD) were as follows:
- Spot 15.7355
- Six month forward 15.9200
- 12 month forward 16.1525
- South African one-year interest rate: 9.50%
- American one-year interest rate: 2.55%
- South African one year expected inflation rate 7.40%
- American one-year expected inflation rate: 0.25%
1. Compare the 12 month forward spread with the interest differential between SA and the USA
2. Calculate the interest parity one-year forward rate and compare it with the actual forward rate. Is there any violation of CIP? Explain why/why not
3. What is expected spot exchange rate 12 months from now according to the theory of relative PPP? Explain in detail
4. "When looking at the information above, it is clearly better for a foreigner to rather invest his/her money in a one year fixed deposit in South Africa than is the USA" Do you agree with the statement or not? Explain in detail by using an example of an American who has USD100000 to invest for one year