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$$$\frac{33\mathrm{.}65}{\text{\$}}/$ 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 $\frac{79\mathrm{.}72}{\text{\$}},$ and the

spot rate was $\frac{83\mathrm{.}65}{\text{\$}}.$

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\mathrm{.}50.$ To see whether the security is fairly priced, which

option prices would you want to examine?