Question

Harmony is a South African mining company that exports 23 ounces of gold to the US. Gold is priced in US dollars but Harmony’s workers are paid in rand (the currency in South Africa). The current price of gold is 1,703 dollars per ounce. The current exchange rate is 18 rand (R) per $1. Harmony’s current mining costs are R14 per ounce. Expected one-year inflation rates are 2 in the US and 5 in South Africa (in %). What is harmony’s current level of profitability? SHOW YOUR WORK.

Answer 1

Calculation of current level of profitability

Particulars amount( InRand)

Total Export Sales =    705042    ( 23 ounces * 1703$/ounces * 18Rand/$)

Less:Mining Cost = (322)    (23ounces * R14/Ounces)

Total current profit =    704720

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Calculation of Expected level of profitability

Expected Exchange rate per $ = 18 R (1+ Inflation rate in Africa)/ (1+Inflation rate in US)

   = R 18.53/ $

Particulars amount( InRand)

Total Export Sales =    725802    ( 23 ounces * 1703$/ounces * 18.53 Rand/$)

Less:Mining Cost = (322)    (23ounces * R14/Ounces)

Total Expected profit = 725480