risk arbitrage

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Related to risk arbitrage: Merger arbitrage

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.
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.
Part III provides a financial economic model of how parties settle cases and shows why plaintiffs and defendants have different risk arbitrage opportunities during settlement depending on the circumstances and the nature of the risks each party confronts.
The only two funds with p-values that are not significant at the 5 percent or 10 percent levels are the risk arbitrage A and risk arbitrage B funds, which have p-values of 74.
The decision to issue pension bonds for risk arbitrage was a fundamentally risky one, but Pittsburgh had very little margin for taking on increased risk.
The issue here is broader than just risk arbitrage.
In summary, when the outcomes are expected and ordinary, risk arbitrage arises from these effects: (1) plaintiffs are more risk averse, (2) single-play plaintiffs bear greater risk arising from the trial outcome, and (3) individual plaintiffs face higher opportunity costs than corporate defendants.
In addition, FlexSpread allows buy-side traders to execute pairs strategies, cross-currency equity pairs trades and risk arbitrage to trade in response to a takeover deal.
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.
Noting continued client demand for pairs and other market-neutral strategies, such as statistical and risk arbitrage, the firm said the pairs algos will work in conjunction with its smart order router, thereby enabling access to a wide range of liquidity sources.
Contributors for the month were a diversified mix of long positions from credit strategies, namely stressed and distressed names, as well as special situation equities, and risk arbitrage.

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