On April 28, 1995, the Paine Webber Group introduced a new type of security on the NYSE: U.S. dollar increase warrants on the yen. At exercise, each warrant entitled the holder to an amount of U.S....

On April 28, 1995, the Paine Webber Group introduced a new type of security on the NYSE: U.S. dollar increase warrants on the yen. At exercise, each warrant entitled the holder to an amount of U.S. dollars calculated as

The “spot rate” in the formula refers to the yen/dollar rate on any day during the exercise period, which extended until April 28, 1996. The 1-year forward rate on April 28 was ¥79.72/$, and the spot rate was ¥83.65/$.

a. What view on the future yen>dollar rate do investors in this security hold?

b. This security was issued at a price of $5.50. To see whether the security is fairly priced, which option prices would you want to examine?