Anticipatory Hedge of a Takeover

Scenario: On Ju'y $15,$ a firm has decided to begin buying up shares of Helix Technology Corporation with the ultimate objective of ob$-$

taining controlling interest. The acquisition will be made by purchasing lots of about $100\mathrm{.}000$ shares until sufficient control is obtained.

The first purchase of $100\mathrm{.}000$ shares will take place on August $15.$ The stock is currently worth $$26$ and has a beta of $2$

August $15$

Current price of the stock is $26$

Current cost

The stock is purchased at its current price of $28\mathrm{.}75.$

Cost of shares: $100\mathrm{.}000($$$28\mathrm{.}75)=$$$2\mathrm{.}875\mathrm{.}000.$

Futures Market

Seprember S&P $500$ futures is at $1,260.50.$

Price per contrace $$315\mathrm{.}125.$

Approximate number of contraces:

$N_1=$

Since if ahould buy futures. ignore the negative sign.

Buy

September S&P $500$ futures is at $1,327\mathrm{.}20.$

Sell

Analysis: When the $100,000$ shares are purchased on August $15,$ they cost

an additional

The profit on the futures transaction is

sale price of futures$)$

$($purchase price of futures

$($profic on futures$).$

Thus, the hedge eliminated all of the additional cost and left a small gain. The shares end up effectively costing