Profits and Losses from Straddles: Julian Herrara, a sophisticated investor who is both willing and able to take risk, has just noticed that Go-West Airlines has become the target of a hostile takeover

ACCOUNTING

Profits and Losses from Straddles:

Julian Herrara, a sophisticated investor who is both willing and able to take risk, has just noticed that Go-West Airlines has become the target of a hostile takeover. Prior to the announcement of the offer to purchase the stock for $72 a share, the stock had been selling for $59. Immediately after the offer the stock rose to $75, a premium over the offer price.

AND SO ON

Construct Herrara’s profit profiles and answer the following questions.

1. What strategy works best if a bidding war erupts?
2. What strategy works best if the hostile takeover is defeated?
3. Which strategy works best if the original offer price becomes the final price?
4. Which of the three positions produces the worst result and under what condition does it occur?
5. If you were Herrara’s financial advisor, which strategy would you advise he establish? Or would you argue that he not speculate on this takeover?

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