Question

Question: Historical Relationship between South African Rand, US dollar and currencies of the BRIC Countrie...

(1 bookmark)

Historical Relationship between South African Rand, US dollar and currencies of the BRIC Countries I BRICS is an acronym for the association of the economies of Brazil, Russia, India, China and South Africa and BRIC is a similar acronym excluding South Africa. Mweleco FX Pty LTD, a foreign exchange trading company based in Johannesburg, has been contracted by a hypothetical Namibian Stock Exchange (NSE) to examine the historical relationship between the Rand(as a proxy for the Namibian Dollar- N$), currencies of the BRIC countries and the US Dollar from April 9, 2006 to March 27, 2011. Issues of interest to the NSE are: • The historical volatility (risk) between the currencies of the BRIC currencies, South African Rand and the US dollar during the period; Project Historical Relationship between South African Rand, US dollar and currencies of the BRIC Countries II • The relationship between BRICS currencies. You are required to provide a brief report (Minimum 4 pages and maximum 8 pages (including tables, figures, references etc.) to the NSE covering the following:

(a). A brief introduction of the study;

(b). Brief literature review on general issues around currency volatility (risk) and returns;

(c). Relationship(s) between the South African Rand, US Dollar and the sampled currencies of BRIC countries and whether the relationship(s) can be, predictably, explored;

(d). Brief discussion of the empirical findings from the study;

(e). Conclusion and some recommendations to the NSE.

Answer 1

a) Rand is the official currency of South Africa. ZA is used as the abbreviation instead of SA because "SA" is allocated to Saudi Arabia (SAR to the Saudi Arabian Riyal). Rand was introduced three months before the country declared itself republic.

b) Exchange rate volatility refers to the tendency for foreign currencies to appreciate or depreciate in value, thus affecting the profitability of foreign exchange trades. The volatility is the measurement of the amount that these rates change and the frequency of those changes. There are many circumstances when exchange rate volatility comes into play, including business dealings between parties in two different countries and international investments. The underlying intuition is simple: exchange-rate risk increases transaction costs and reduces the gains to international trade. Surprisingly, macroeconomic evidence of the effect of exchange-rate volatility on trade, and more generally on growth, has been quite mixed, pointing to very small or insignificant effects. In that context, it seems quite puzzling to see a number of countries, especially the emerging economies, adopting more or less fixed exchange-rate systems,

c) Since the inception of Rand it was worth US$1.40. However, Its value thereafter fluctuated as various exchange rate dispensations. In 1980s there was high inflation and mounting political pressure along with sanctions placed against the country due to opposition of apartheid system leads to the reduction in the value of currency.

d) At the start of 2006, however, the currency resumed its rally, and as of was trading under R 6 to the dollar again. However, during the second and third quarters of 2006 (i.e. April through September), the rand weakened significantly.

In sterling terms, it fell from around 9.5p to just over 7p, losing some 25% of its international trade-weighted value in just six months. In late-2007, the rand rallied modestly to just over 8p, only to experience a precipitous slide during the first quarter of 2008.This downward slide could be attributed to a range of factors: South Africa's worsening current account deficit, which widened to a 36‑year high of 7.3% of gross domestic product (GDP) in 2007; inflation at a five-year high of just under 9%; escalating global risk aversion as investors' concerns over the spreading impact of the sub-prime crisis grew; and a general flight to "safe havens", away from the perceived risks of emerging markets. The rand depreciation was exacerbated by the Eskom electricity crisis, which arose from the utility being unable to meet the country's rapidly growing energy demands.

However this was not the end it has to face much more challenges in years after 2012.