Foreign Exchange: Spot, Forwards and Rand Conventions
What the exam tests
The FX section tests quoting conventions, value dating, forward pricing from interest-rate differentials, and the rand-specific environment: exchange control, the JSE currency futures market, and the difference between onshore and offshore rand pricing.
Core rules
- Spot FX settles T+2 (T+1 for some pairs such as USD/CAD). A Friday trade normally values Tuesday, and a public holiday in either centre rolls the value date.
- Quotes are two-way. In USD/ZAR the base currency is the US dollar, so a higher number means a weaker rand. Always identify which currency is base before computing anything.
- Forward points come from the interest differential. The currency with the lower interest rate trades at a forward premium. Covered interest parity sets the fair forward: F = S x (1 + i_quote) / (1 + i_base).
- South African residents transact foreign exchange through authorised dealers under Exchange Control rules; the offshore rand (NDF) market prices separately from onshore.
- JSE currency futures are exchange-traded, margined in rand, and cash-settled, so they hedge exposure without physical delivery.
Worked example: one-year USD/ZAR forward
Spot 18.0000, ZAR one-year rate 8.25%, USD one-year rate 5.25%.
- F = 18.0000 x (1.0825 / 1.0525) = 18.0000 x 1.028504 = 18.5131
- Forward points: 5,131 (quoted in the last decimal places)
The dollar is at a forward premium because its interest rate is lower. A South African importer locking in a dollar payment pays more rand forward, but earns the higher rand rate on the rand it holds in the meantime.
Traps that cost marks
- Inverting the interest differential and quoting the forward the wrong side of spot.
- Ignoring the value date when the forward period is not a round number of months.
- Mixing up direct and indirect quotes when computing a cross rate.
- Assuming forward points are a forecast of the spot rate; they are a pricing calculation.