Question

Ghana’s inflation is forecasted to be 10.2% over the coming year whilst that of South Africa is forecasted to be 6.5%. The current exchange rate between Ghana Cedi and the South African Rand is 0.32 ZAR per 1 GHS.

i) How should we quote the exchange rate between Ghana Cedi and the South African Rand (ZAR) in a year’s time to avoid arbitrage?

ii) A Ghanaian company is importing goods worth ZAR 20m in a year’s time, how much GHS will the company require to import the goods?

iii) If the actual rate at the end of the year is 0.35 ZAR per 1GHS, what is the absolute forecast error for the forecast in (i)?

Answer 1

1)

forward rate = spot rate*[(1+inflation in ghana) / (1+inflation in South africa)]

= 0.32*[(1+10.2%) / (1+6.5%) ]

= 0.33 ZAR per 1 GHS(rounded to two decimals)

ii)

GHS require = 20 million / 0.33

= 60.61million GHS (rounded to two decimals)

(NOTE: here expected exchange rate of 0.33 is used. instead if we use spot rate of 0.32 answer would be 62.5(20 / 0.32))

iii)

when actual rate = 0.35

GHS required = 20million / 0.35

= 57.14million

absolute fore cast error (in percentage) = (actual value - expected value) / actual value

= (57.14 - 60.61) / 57.14

= 6.06%(rounded to two decimals)