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Research Details

Speculating on a Tender Offer Using Options: The Case of RJR Nabisco

Abstract

Tender offers can create a cash flow for shareholders which is similar to a dividend. Option prices will reflect the probability and magnitude of this "dividend." This paper shows that the value of a box spread is related to the discounted, risk-neutral probabilities of exercising both a call and a put at the same strike price. Thus, the box spread can serve as a state-contingent claim for the payment of a dividend, and it is therefore a natural vehicle for speculating on the success of a tender offer. We show how a box spread could have been used to speculate on the success of the KKR tender offer for RJR Nabisco.

Type

Working Paper

Author(s)

Robert L. McDonald

Date Published

1992

Citations

McDonald, L. Robert. 1992. Speculating on a Tender Offer Using Options: The Case of RJR Nabisco.

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