A large manufacturing company has offered to purchase Composites, Inc. for $32 per share. Before the merger proposal announcement, Composites was trading at $20/share and, after the announcement, its share price jumped up to $28/share. It is estimated that, if the merger fails to go through, the price of Composites will drop to $15/share. a) Assuming that the risk-free interest rate is 0%, how would you describe a long position in Composites as a combination of positions in a risk-free bond and a binary put option? Please show your workings in detial. b) Assuming that the risk-free interest rate is 0%, how would you describe a long position in Composites as a combination of positions in a risk-free bond and a binary call option? Please show your workings in detial. c) Please explain the event-driven strategies through the selling insurance view.
A large manufacturing company has offered to purchase Composites, Inc. for
$32 per share. Before the merger proposal announcement, Composites was
trading at $20/share and, after the announcement, its share price jumped up to
$28/share. It is estimated that, if the merger fails to go through, the price of
Composites will drop to $15/share.
a) Assuming that the risk-free interest rate is 0%, how would you describe
a long position in Composites as a combination of positions in a risk-free
bond and a binary put option? Please show your workings in detial.
b) Assuming that the risk-free interest rate is 0%, how would you describe
a long position in Composites as a combination of positions in a risk-free
bond and a binary call option? Please show your workings in detial.
c) Please explain the event-driven strategies through the selling insurance
view.
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