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q1) how do u estimate the the forward rate here, why the Marking scheme divides by 3??
q2) How do u decide the whether its call or put? contract currency is ZP since theyre receiving money they have to sell ZP and buy Euro so it is put??
this question is quite confusing why we dont find the no .of contracts???
1. They are using the interest rate parity formula to get the forward rate.
However the interest rates are annual rates, and for a 4 month forward rate we need the 4 month interest rates. A 4 month interest rate is 4/12 (or 1/3) of the annual interest rate.2. The options (per the question) are Euro call or put options. Since they want to buy Euros they need a Euro call option.
It is only traded options that have to be dealt in in fixed size contracts. These are OTC options and therefore they can be used on the exact amount needed.
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