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

Question

Quizplus · Accepted Answer

If the speculator expects the Fed to intervene by exchanging dollars for Japanese yen, then it implies that the demand for yen will increase. This increase in demand will cause the price of yen to rise. To capitalize on this intervention, the speculator can purchase yen call options, as call options give the holder the right, but not the obligation, to purchase the yen at a specified strike price. If the price of yen rises due to the intervention, the speculator can exercise the call option and purchase yen at the lower strike price, selling it in the market at the higher price and making a profit.

If a Speculator Expects That the Fed Will Intervene by Exchanging