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MLC firm is likely to be the target in a takeover attempt by AZV firm. The...

MLC firm is likely to be the target in a takeover attempt by AZV firm. The stock price is likely to rise over the next few weeks as the takeover progresses, but if it fails, the stock price of MLC is likely to fall even more than the rise. (i) What option strategy might exploit this information? (03 Marks) (ii) What will be the  (Delta) of the above option strategy (03 Marks) (Hint: Do not need to evaluate the expression)

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Answer #1

i]

A long straddle strategy can exploit this information.

A long straddle involves buying an at-the-money call option and simultaneously buying an at-the-money put option of the same strike price. The strategy is employed when a large move is expected, but the direction of the move is uncertain.

ii]

This is a delta-neutral strategy. The delta of the this strategy is close to zero because the sum of the deltas of call and put options of the same strike price is 0.

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