Suppose the spot exchange rate for the South African rand is R15/£ and the 6-month forward rate is R16/£.

(a) Which is worth more, the British pound or South African rand?

(b) Assuming absolute PPP holds, what is the cost in the United Kingdom of a Castle beer if the price in South Africa is R20? Why might the beer actually sell at a different price in the United Kingdom?

(c) Is the British pound selling at a premium or a discount relative to the South African rand?

(d) Which currency is expected to appreciate in value?

(e) Which country do you think has higher interest rates – the United Kingdom or South Africa? Explain.