5. Suppose the (riskless) rate on Euro-denominated T-bills is higher than the U.S. Treasury bill rate. If the spot rate

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5. Suppose the (riskless) rate on Euro-denominated T-bills ishigher than the U.S. Treasury bill rate. If the spot rate S isquoted $ per Euro, would you expect that the forward rate F (also$/Euro) will be higher or lower than S? Explain. Does this indicatewhether the Euro will rise or decline in value in the future?Explain.
2. The price of a stock is currently $100 per share. The premiumon a European put on this share at exercise price $100 (“on themoney”) is $5 per share. a. Suppose an investor purchases thisstock and buys an “on the money” put option (i.e., has exerciseprice equal to the current price) for each share she buys. Draw theprofit “profile” (profits that would result from every possiblestock price outcome by the expiration date of the option). Explain.b. Compare this pattern with the pattern that results from buying acall option on this stock at the same exercise price. Which isbetter, the call option or the position in (a)? Explain.
3. A dealer forecasts that the discount rate on a 60-day billwill be 5.10%. The current discount rate on a 90-day bill is 5.30%.What is the highest 30-day repo rate the dealer can afford to payand still expect to break even?
4. I offer to borrow money from you for 90 days at the followinginterest rate quotations: A. a discount rate of 5%. B. a simpleinterest money market rate of 5.04%. C. a “bond equivalent” yield(simple interest 365 day) rate of 5.11%. Which is the better dealfrom your point of view?