9 Suppose a bank sells a call option to a company making a takeover offer where the option is contingent on the offer being accepted. Suppose the bank reinsures the option on an options exchange by buying a call for the same amount of foreign currency. Consider the consequences of the following four outcomes or ‘‘states:’’

a The foreign currency increases in value, and the takeover offer is accepted.

b The foreign currency increases in value, and the takeover offer is rejected.

c The foreign currency decreases in value, and the takeover offer is accepted.

d The foreign currency decreases in value, and the takeover offer is rejected.

Consider who gains and who loses in each state, and the source of gain or loss. Satisfy yourself why a bank that reinsures on an options exchange might charge less for writing the takeover-contingent option than the bank itself pays for the call option on the exchange. Does this example help explain why a bank-based over-the-counter market coexists with a formal options exchange market?