risk arbitrage

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Related to risk arbitrageur: 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 ?
with more protection, risk arbitrageurs in low-protection countries will
The authors also point out that annualizing event window returns can be misleading because risk arbitrageurs are implicitly assumed to earn event time abnormal returns on a continuing basis.
During this period, the additions to, or deletions from, the index are announced by S&P before they become effective, which may allow some time for risk arbitrageurs to accumulate shares of the added stock before the index funds respond.
There are many skillful players in this lucrative line of work, and the profits are so vast that today Salomon Brothers estimates that $10 billion of capital is in the hands of risk arbitrageurs, compared to only $10 million ten years ago.
as an institutional equity block trader assisting risk arbitrageurs, corporate and financial takeover specialists, leveraged buyout groups, pension funds and money managers.

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