On April 28, 1995, the Paine Webber Group intro- duced 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 Greater of 1i2 0 and 1ii2 +100 - 3+100 * (¥83.65> + >Spot rate)4
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?