Firm A has a stock price of $40 and has made an offer for firm B where

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Firm A has a stock price of $40 and has made an offer for firm B where A promises to pay $60/share for B, as long as A’s stock price remains between $35 and $45. If the price of A is below $35, A will pay 1.714 shares, and if the price of A is above $45, A will pay 1.333 shares. The deal is expected to close in 9 months. Assume σ = 40%, r = 6%, and δ = 0.
a. How are the values 1.714 and 1.333 arrived at?
b. What is the value of the offer?
c. How sensitive is the value of the offer to the volatility of A’s stock?
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Derivatives Markets

ISBN: 978-0321543080

4th edition

Authors: Rober L. Macdonald

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