Risk arbitrage

Traditionally, the simultaneous purchase of stock in a company being acquired and the 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.

Risk Arbitrage

In hedge funds, an investment strategy related to mergers and acquisitions involving the purchase and/or shorting of an acquired company's stock. In a cash merger, the stock of the acquired company often trades below the offer price until the deal is completed. A hedge fund may buy at the lower price and wait for the deal to be completed, at which point it makes a profit. In a stock-for-stock merger, the acquiring company (with more valuable stock) offers to exchange the acquired company's stock for its own at a certain ratio. A hedge fund may then short sell the acquiring company's stock while simultaneously buying stock in the acquired company. When the deal goes through, the acquired company's stock is converted and the new stock returned to the owner from which the hedge fund borrowed. In both these situations, the primary risk is the possibility that the deal may fail in the middle of the hedge fund's transactions. See also: Exchange ratio.

risk arbitrage

The simultaneous purchase and sale of assets that are potentially, but not necessarily, equivalent. For example, Firm A may make an offer to acquire Firm B by exchanging one share of its own stock for two shares of Firm B's stock. If the stock of Firm A is trading at $50 and the stock of Firm B is trading at $23, the risk arbitrager would buy shares in Firm B and sell short one-half this number of shares in Firm A. If the buyout offer is approved, the two stocks will exchange on a one-for-two basis and the arbitrage position will be profitable. The risk is that the buyout will be unsuccessful and the exchange of stock will not take place. Risk arbitrage is also used in situations involving reorganizations and tender offers. Also called equity arbitrage.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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References in periodicals archive

We find the return of the value- weighted risk arbitrage portfolio exhibits a significant non-linear relationship with that of the market portfolio.

Is risk arbitrage market neutral: the case of stock swap offers with collars

When a defendant is confronted with the threat of catastrophic liability, the risk arbitrage opportunity flips in favor of the plaintiff.

A financial economic theory of punitive damages

Because pension bonds are used for financial risk arbitrage, the Treasury Department does not permit them to be issued on a tax-exempt basis.

Risky business? Evaluating the use of pension obligation bonds

The issue here is broader than just risk arbitrage.It is the value system of Wall Street, a deregulated, in-bred community where high overheads and abundant opportunities for wealth propel investment bankers to generate ever more information, more fees, more short-term speculation.

The bad barrel

The company also questioned Elliott's motivations, claiming that the hedge fund's motives "...appear to be based on a short-term risk arbitrage trade rather than long-term shareholder value creation."

Dialog Semiconductor Raffirms Commitment to Merger Following Elliott Management Objection

He then held multiple senior positions at investment banks including Bear Stearns where he was a managing director on the Risk Arbitrage sales and trading desk in London.

United First Partners names executive; launches new wealth advisory business

This Article provides a risk arbitrage analysis of the relationship between variance, litigation valuation, and optimal deterrence.

A financial economic theory of punitive damages

The tool also enables management of cross-currency risk arbitrage deals.

FlexTrade unveils cross-currency tool

Dan worked on the Risk Arbitrage and Relative Value desk at Bear Stearns prior to joining JPM.

GFI Group sets up European Special Situations group

(13) The names of the hedge funds have been omitted to maintain their privacy, and we will refer to them only by their stated investment styles, for example, relative value fund, risk arbitrage fund, etc.

Do hedge funds increase systemic risk?

"It's a unique feature of what we consider to be a unique building," said Propp, who began his real estate career after working in research and risk arbitrage on Wall Street.

Tahl Propp Equities buys Park Avenue building for a song

In addition to expanding our fundamental research offering, we have built out two other highly respected teams-Derivative Strategy and Event-Driven/Special Situations (including risk arbitrage, litigation, credit and distressed equity research),' said Nick Wood, SFG's co-head of Equities and Head of Derivatives.

Susquehanna Financial Group names new director of Research