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In 2002 a former executive with Macquarie Bank, Simon Hannes, was jailed for insider trading. The offence related to Mr Hannes trading on the basis of information he had received indicating the likely takeover of the transport company TNT by the Dutch firm KPN. Specifically, having learnt of the impending takeover, and at a time when TNT was trading at approximately $1.56 per share, Mr Hannes purchased almost $90 000 worth of short-dated call options with an exercise price of $2. Following the public announcement of the takeover bid, the share price for TNT increased to approximately $2.40 per share. Mr Hannes attempted to sell his options but the trades were questioned by his broker. Had the sale been successful he would have generated a profit in excess of $2.3 million. (a) Why do you think Mr Hannes employed options rather than shares to exploit the price-sensitive information he had in his possession? Specifically, why do you think he used short-dated out-of-the-money call options? (b) Could Mr Hannes have used put options to exploit the same information? . Please note: The related case study Insider Trading and Options: A Case Study from Steve Easton and Irena Ivanovic is also available on Canvas. The material contained in the case study, Insider Trading and Options: A Case Study, is not examinable

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