Bidder Company is working out an agreement to takeover Target Company. Based on current values, they would like to set the terms of the deal as $5 per share, which is equivalent to an exchange ratio of 1 share of Bidder every 2 shares of target.

a. Bidder is expecting that its price will be increasing, and Target wants to make sure that its shareholders get a fair price. Design a collar that gives Target shareholders 1 share of Bidder for every 2 of their shares within a range, but will guarantee that the value of the shares that Target receives is within 10% of its current value of $5.

b. Bidder is concerned about dilution if its price falls and Target wants some certainty within a likely range of prices. Design a collar that will guarantee Target shareholders shares worth $3 as long as Bidder shares are in their likely range of $10 +/- 10%. Outside of that range Target shareholders will receive a fixed ratio of shares.