Question

1. ( six parts) Harmony is a South African mining company that sells gold globally. Gold is priced in dollars but South African miners are paid in rand (“rand” is the South African currency). The current price of gold is $1,288 an ounce. The current exchange rate is 8.62 rand (R) per $1. Harmony’s current costs are R10,930 per ounce. Expected one-year inflation rates are 2% in the U.S. and 8% in South Africa. [Note that the “ounces” in this case are like “BMW cars” in quiz 6, but the questions below are per ounce, or “per car”]

a) (3points) How much profit per ounce is Harmony currently generating (in rands)?

b) (3 points) What exchange rate does PPP predict in one year?

c) (3 points) What level of revenues in one year would maintain Harmony’s profitability in real (inflation-adjusted) terms?

d) (3 points) If in one year the actual exchange rate is R6.60 per $1, has the rand appreciated or depreciated against the dollar in nominal terms?

e) (3 points) Based on the exchange rate in d), what will be Harmony’s profit per ounce in one year?

f) (3 points) State whether Harmony benefits from an appreciation or depreciation of the dollar against the rand?

Answer 1