Reference no: EM132655666

Read the case study below and answer the questions that follow: The rand hits new levels of volatility The rand is back as the world's most volatile major currency, and options pricing suggests it's not going to lose that status any time soon. A gauge of expected swings over the next six months, based on prices of options to buy and sell the rand, has jumped 175 basis points since the beginning of August to 16.1% on Thursday. Historical volatility climbed 61 basis points to 13.8%, the highest among 16 major developed- nation and emerging-market currencies tracked by Bloomberg. That took the spread of implied over realised volatility to the most in almost a year, as traders hedge against currency fluctuations amid the escalating trade war and concern about South Africa's fiscal outlook. The premium of options to sell the rand over those to buy it, known as the 25 Delta risk reversal, widened 23 basis points to 338. South Africa's currency has depreciated 6.5% versus the dollar in August, the worst performance among emerging-market currencies after Argentina's peso. This week alone, it has whipsawed between daily gains of as much as 1.1% and losses of 1.9%. It strengthened 0.8% to 15.28 per dollar by 14h17 in Johannesburg.

Answer the following:

1) Draw a graph illustrating the determination of the equilibrium exchange rate between the South African Rand and the US dollar. Analyse the effect of an increase or a decrease in the U.S. inflation on the South African rand.