Arbitrage involving risk.
Speculation on perceived mispriced securities, usually in connection with merger and acquisition deals. Mike Donatelli, John Demasi, Frank Cohane, and Scott Lewis are all hardcore arbs. They had a huge BT/MCI position in the summer of 1997, and came out smelling like roses.
The purchase of a stock on rumor or news of a corporate takeover, with the aim of getting a higher price. Offsetting hedging transactions may also be undertaken. This strategy is to be distinguished from conventional arbitrage (See Arbitrage).
During a takeover, the acquiring company's shares become an arbitrage equivalent for the target company's shares, and a divergence in their value creates an arbitrage opportunity. The 'risk' element here is that, if the takeover does not go through, the arbitrage equivalence will break down and the arbitrageur is likely to experience losses.
Traditionally, the simultaneous purchase of stock in a company being acquired and sale of stock of the acquirer. Modern "risk arbitrage" focuses on capturing the spreads between the market value of an announced takeover target and the eventual price at which the acquirer will buy the target's shares.
Is a form of trading whereby the risk arbitrageur attempts to profit from issues involved in merger/acquisitions. The underlying rationale is that the current price after the announcement is still below the bid price. Also, the company may find itself subject to other bids for its stock in excess of the initial announced bid. These price differentials are the arbitrage part. The risk is that other bids do not materialize or the initial announcement fails due to other considerations.
The simultaneous purchase of stock in a company which is being acquired and the sale of stock in the acquiring company. Profits are made on the expected rise of price in the shares of the acquired company and the decrease in price of the acquiring company's shares. Also referred to as takeover arbitrage.
A form of arbitrage that has some risk associated with it. Commonly refers to potential takeover situations where the arbitrageur buys the stock of the company about to be taken over and sells the stock of the company that is effecting the takeover.
A purchase and short sale of potentially equal securities at prices that may realize a profit. (See Bona Fide Arbitrage.)
An event-driven hedge fund investment strategy. In a risk arbitrage or merger arbitrage strategy, a manager takes a long position in the stock of a company being acquired in a merger, leveraged buyout, or takeover and simultaneously takes a short position in the stock of the acquiring company.
Risk arbitrage, or merger arbitrage, is an investment or trading strategy often associated with hedge funds.
