If a speculator expects that the Fed will intervene heavily by exchanging dollars for Japanese yen in order to affect the exchange rate, she would most likely ____ to capitalize on this intervention.

Question

Quizplus · Accepted Answer

If the Fed is expected to intervene heavily to affect the exchange rate, it is likely that the value of the yen will increase. Therefore, purchasing yen call options would allow the speculator to capitalize on this increase in value without having to purchase large amounts of yen upfront. Purchasing yen put options, as in choice A, would not be profitable in this scenario. Selling yen futures contracts, as in choice B, would potentially result in losses if the value of the yen increases. Buying U.S. Treasury bonds, as in choice D, would not necessarily be profitable in this scenario.

If a Speculator Expects That the Fed Will Intervene Heavily