You have $12,500 that you want to use to speculate in yen options. The spot rate is 108.84/$. You think that, at this rate, the yen is underpriced and, therefore, you expect it to substantially appreciate against the dollar in the coming few weeks. You decide to use your $12,500 to act on your expectations. The yen three-week calls and puts with an exercise price of $0.009000/ are selling for (i.e. premiums are) $0.000200/ and $0.000400/yen respectively. (Each yen contract calls for the exchange of 6.25 million yen)

a. Would you buy call or put contracts? Explain.

b. How many contracts can you buy with the money you have?

c. Assume that you buy 20 put contracts. If at the end of three weeks the spot rate is 119.20/$, calculate your total payoffs and profit/loss from your investment.