[rouri]

Thanks for the explanation, I did watch the lectures but missed the part about contract size being the determinant.

[rouri]

This is an excerpt from the question
“The first derivative product is an over-the-counter forward rate determined on the basis of the Zuhait base rate of 8·5% plus 25 basis points and the French base rate of 2·2% less 30 basis points. current spot exchange rate of ZP142 per €1. ”

This is the answer “Using forward rate
Forward rate = 142 x (1 + (0·085 + 0·0025)/3)/(1 + (0·022 – 0·0030)/3) = 145·23”

why do we divide by 3 and why do we divide by the French basis points?

[rouri]

It has to do with option pricing, particularly the Black Scholes model.

According to the formula you first compute the call option, and if the question asks to price a Put option, then you use the call option result and insert it in the put-call parity equation to compute the put option pricing.

Essentially using one formula output (call) as input in the second formula (put).

[rouri]

Has the component beta been removed from the new syllabus? Because I can’t find it in the new BPP text so I don’t understand it.

If it is still applicable, could you please provide a brief explanation on its computation?

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