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Dear Sir,
I actually have two questions.
– Q1ci) on the option outcome, isn’t there also going to be a gain of (126-125.8)×640 contracts ×.125= 16m on top of the 10080 receipt and 304 premium to pay.
-Q3 aii) Why is Chris’ 2m shares multiplied by 5 to get 10m?
Many thanks, Justine
Q1: Strictly, the way traded options work is that the transaction is converted at whatever spot turns out to be and then we ‘claim back’ from he dealer the difference between the exercise price and the spot rate.
Here, we don’t know what the spot rate is on the date of the transaction and so we use the fact that the net affect of using options is to ‘fix’ the worst outcome at whatever the exercise rate it.Q2: The question says that the terms of the take-over are “one Chawon share for five Selome shares”. Given that Chris currently owns 2M Chawon shares, he will instead own 2M x 5 = 10M Selome shares.
(In future please ask separate questions in separate posts. The reason is that our answers are to benefit all students and many use the search box to find previous answers 🙂 )
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