Introduction

Exchange rates: Activities

1 An exchange rate is the price of one country’s currency in terms of another country’s currency.

Correct. The statement is indeed true.

Incorrect. The statement is true.

2 Which one of the following indicates the indirect method of quoting the exchange rate between the South African rand and the US dollar?

Incorrect.

This is the direct method of method of quoting exchange rates. The value of a country's currency is expressed as the quantity of the domestic currency required to purchase one unit of a foreign currency (e.g. R15 = $1,00).

Correct.

This is the indirect method. The value of a country's currency is expressed as the quantity of the foreign currency required to purchase one unit of the domestic currency (e.g. R1 = $0,06).

3 If the exchange rate is quoted as R20 = $1, the indirect quote is R1 = …

$
(two decimal places)

Correct. It is $0,05.

The calculation is as follows:
$1/R20 = $0,05

Incorrect. It is $0,05.

The calculation is as follows:
$1/R20 = $0,05

4 An exchange rate of R15,00 = $1,00 is an example of a nominal bilateral exchange rate.

Correct.

It is quoted in nominal terms and involves the currencies of two countries.

Incorrect.

It is quoted in nominal terms and involves the currencies of two countries.

5 The middle rates published by the South African Reserve Bank in the Quarterly Bulletin are the same as the spread.

Incorrect. The statement is false.

The middle rate is a weighted average of the daily rates of the banks at approximately 10:30.
The spread is the difference between the buying rate and the selling rate.

Correct. The statement is indeed false.

The middle rate is a weighted average of the daily rates of the banks at approximately 10:30.
The spread is the difference between the buying rate and the selling rate.

6 If more South African rands are required to purchase a US dollar, then the rand _____ and the dollar ______.

Incorrect.

The dollar is now more expensive in rand terms. This causes the rand to depreciate and the dollar to appreciate.

Correct.

The dollar is now more expensive in rand terms. This causes the rand to depreciate and the dollar to appreciate.

Data questions

Questions 7 to 18 are based on the table Exchange rates in the SARB Quarterly Bulletin, June 2020.

7 Against which currency in 2019 did the rand appreciate?

Correct. It has depreciated against all the currencies.

[Table?]

Incorrect. It has depreciated against all the currencies.

[Table?]

8 In July 2019 the South African rand appreciated against the Chinese yuan compared to June 2019.

Correct. The statement is indeed true.

In July the exchange rate was 204,24 cents against the Chinse yuan and in June 2019 it was 2 011,09 cents. This indicates an appreciation of the rand against the Chinese yuan.

Incorrect. The statement is true.

In July the exchange rate was 204,24 cents against the Chinse yuan and in June 2019 it was 2 011,09 cents. This indicates an appreciation of the rand against the Chinese yuan.

9 In 2019 the South African rand depreciated by ____ % against the US dollar compared to 2018.

% (one decimal place)

Correct. It depreciated by 9,2%. In 2019 the exchange rate was 1 444.84 cents = $1 and in 2018 it was 1 323.39. The percentage change is

$$
\Bigl[
\Bigl(
\frac
{\text{1444,84}} {\text{1323,39}}
\Bigl)
\ -1
\Bigl]
\times 100
$$

= (1.091772 – 1) x 100
= 0.091772 x 100
=9,2%

Incorrect. It depreciated by 9,2%. In 2019 the exchange rate was 1 444.84 cents = $1 and in 2018 it was 1 323.39. The percentage change is

$$
\Bigl[
\Bigl(
\frac
{\text{1444,84}} {\text{1323,39}}
\Bigl)
\ -1
\Bigl]
\times 100
$$

= (1.091772 – 1) x 100
= 0.091772 x 100
= 9,2%

10 The spot exchange rate provides importers and exporters with an opportunity to cover themselves against risk of changing exchange rates.

Incorrect. The statement is false.

It is the forward exchange rate that provides exporters and importers with an opportunity to cover themselves against risk of changing exchange rates.

Correct. The statement is indeed false.

It is the forward exchange rate that provides exporters and importers with an opportunity to cover themselves against risk of changing exchange rates.

11 In 2017 the three-month US dollar forward cover rate was higher than that for 2018.

Correct. The statement is indeed true.

The three-month US dollar forward cover rate in 2017 was 1 351,85, whereas in 2018 it was 1 339,45.

Incorrect. The statement is true.

The three-month US dollar forward cover rate in 2017 was 1 351,85, whereas in 2018 it was 1 339,45.

12 A real exchange rate is the rate that you actually have to pay when purchasing a foreign currency at the local branch of your bank.

Incorrect. The statement is false.

The rate you pay when you purchase a foreign currency is the nominal rate. The real exchange rate takes the inflation differentials between the countries into account.

Correct. The statement is indeed false.

The rate you pay when you purchase a foreign currency is the nominal rate. The real exchange rate takes the inflation differentials between the countries into account.

13 If Country A's inflation rate is higher than Country B's inflation rate, Country A's exports to Country B will become less competitive, ceteris paribus.

Correct. The statement is indeed true.

Since prices rise faster in Country A, this decreases the competitiveness of the products produced in Country A.

Incorrect. The statement is true.

Since prices rise faster in Country A, this decreases the competitiveness of the products produced in Country A.

14 . If Country A's inflation rate is higher than Country B's inflation rate, the competitiveness of Country A's exports to Country B can be maintained by allowing Country A's currency to ________ against Country B's currency by the difference (or margin) between the two inflation rates.

Correct.

Competitiveness can be maintained by a depreciation.

Correct.

Competitiveness can be maintained by a depreciation.

15 If the South African inflation rate is 12% per annum and that of the United States is 10% per annum, the rand must depreciate by ____ % against the US dollar for the prices of South African exports to the United States to stay the same, ceteris paribus.

%

Correct.

The depreciation is equal to the inflation differential of 2%.

Incorrect.

The depreciation is equal to the inflation differential of 2%.

16 If the index of the real rand/dollar exchange rate (measured as SA cents per US dollar) changes from 100,0 to 95,0, there was ________ of the rand against the dollar in real terms.

Incorrect.

A fall in the value of the index indicates a depreciation, whereas an increase in the index indicates an appreciation.

Correct.

A fall in the value of the index indicates a depreciation, whereas an increase in the index indicates an appreciation.

17 South African exporters will generally prefer a real appreciation of the rand against other currencies to a real depreciation of the rand against other currencies.

Incorrect. The statement is false.

South African exporters will prefer real depreciation since it decreases the price of exports.

Correct. The statement is indeed false.

South African exporters will prefer real depreciation since it decreases the price of exports.

18 If the index of the real R/$ exchange rate falls to below 100,0, it indicates that the rand is ________ against the dollar, based on the assumption that it was valued correctly in the base year.

Correct.

A fall in the R/$ exchange rate below 100 indicates an overvaluation.

Incorrect.

A fall in the R/$ exchange rate below 100 indicates an overvaluation.