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

Greater of (i) 0 and

(ii) $100 – [$100 × (¥ 83.65/ $ / Spot rate)]

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?