1.Assume that a security is currently priced at $200. The risk-free rate is 5 percent.

a)A dealer offers you a contract in which the forward price of the security with delivery in three months is $205. Explain the transactions you would undertake to take advantage of the situation.

b) Suppose the dealer were to offer you a contract in which the forward price of the security with delivery in three months is $198. How would you take advantage of the situation?

2.The euro currently trades at $1.0231. The dollar risk-free rate is 4 percent, and the euro risk-free rate is 5 percent. Six-month forward contracts are quoted at a rate of $1.0225. Indicate how you might earn a risk-free profit by engaging in a forward contract. Clearly outline the steps you undertake to earn this risk-free profit.