On 30 April 2024, ENMB Bank quoted the following spot exchange rate outright quotation and forward exchange rates (in forward points) for the USD (in ZAR/USD quotation).

USD/ZAR exchange rates quoted by ENMB Bank on 30 April 2024:

Spot (USD/ZAR): Bid is 18.2449 and offer is 18.9569

3-month swap rate (Forward value date: 30 July 2024): Bid is 2249 and offer is 2550

12-month swap rate (Forward value date: 30 April 2024): Bid is 7900 and offer is 9925

Other important information

Expected inflation rate in SA over the next 12 months: 6.25%

Expected inflation rate in the US over the next 12 months: 2.75%

The price of one Ford Mustang motor vehicle in the US: USD 30920

The price of one Ford Mustang motor vehicle in South Africa: ZAR 1 142900

US 12-month interest rate: 3.50% South African 12-month interest rate: 9.25%

2.1 The exchange rate at which ENMB Bank is willing to sell the USD 12 months forward is _____?

2.2 How much will a customer of ENMB Bank (called ABC Ltd.) receive when selling USD50000 to ENMB Bank with a 3-month forward contract?

2.3 How much will ENMB Bank pay if it buys ZAR 15 million from a client with a 12-month forward contract?

2.4 Calculate the spot (ZAR/USD) mid-rate. NB! Note the quotation format.

2.5 Calculate the 3-month and 12-month (ZAR/USD) mid-rates.

2.6 Suppose a client, called XYZ Ltd., enters a 3-month forex swap with ENMB Bank. The forex swap entails XYZ Ltd. buying USD 1 million from ENMB Bank spot and then selling it back 3 months forward. What will the profit/loss for XYZ Ltd. be on this 3-month forex swap

Use spot and forward mid-rates (as calculated in 2.4 and 2.5) to calculate the answers to questions 2.7 - 2.11

2.7 Which currency is trading at a 3-month forward discount? Calculate the applicable forward discount percentage (annualised).

2.8 What should the 12-month forward mid-exchange rate (USD/ZAR) be according to the covered interest parity (CIP) equilibrium condition?

2.9 Suppose we apply the Law of One Price (LOP) to a single product like a Ford Mustang motor vehicle (see prices in Table 2.1 above). What is the USD price of the Ford Mustang compatible with the LOP at the current spot mid-exchange rate?

2.10 What is the ZAR/USD spot exchange rate compatible with the LOP, given the current USD and ZAR prices for the Ford Mustang?

2.11 Use the LOP to determine if the ZAR is currently over or undervalued against the USD. Prove it by calculating the percentage over/undervaluation for the ZAR. Tip 1: The LOP will indicate the "should be" exchange rate, so compare that with the actual exchange rate. Tip 2: focus is on the ZAR, so make the ZAR the base currency