On August 3, 1983, Merck, the giant U.S.-based pharmaceutical company, reached an agreement with Banyu for the friendly acquisition of 50 %

of Banyu's stock for $313.5 million at a price of ¥670 per share. It was estimated that for the transaction to be executed, it would take approximately 60 days for the Japanese Ministry of Finance to approve it and another 30 days for the bureaucratic obstacles to be overcome. Yet the outcome would be still in doubt, since this foreign acquisition would be the first in the annals of Japan's mergers and acquisitions.

Advise the treasury of Merck as to the proper hedging strategy that should be structured. On August 2, 1983, the yen/dollar exchange rate was Sl,$(O) =

243.35, Fu(60) = 241.85, and Fu(90) = 241.02 with respective 30-, 60-, and 90-day interest rates to remain flat over the next 90 days. Available American options on spot and futures are listed in table 8.4.

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Table 8.4 Put and Call Option Premia Strike Price 90-day Call Premium 90-day Put Premium 230 5% 1% 228 4% 2% 226 3% 3% 224 2% 4% 220 1% 5%