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Various Types of merger arbritrage

Arbitrage is the zero-investment purchase of a security financed by the sale of an identical security

Discuss the mechanics of various types of merger arbitrage, I.e., Cash Deals, Stock Mergers, and
complex merger transactions (cash, and various types of stock exchanges). Discuss the mechanics of each type, their potential use, examples of use, and any advantages or disadvantages.

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Arbitrage is usually defined as the purchase of one security and simultaneous sale of another to give a risk-free profit. "Arbitrage" or "risk arbitrage" often used loosely to describe the taking of positions in related securities at the time of the takeover bid.

Merger arbitrage, also called Risk Arbitrage is one of the most popular hedge fund strategies. It involves buying the stock of the company being acquired while selling short the stock of the acquiring company. Normally the acquirer will offer a premium in order to purchase the target company. After a merger deal is announced, the price of the target company usually moves substantially higher to reflect the premium in value being paid by the acquiring company. Despite this increase, the ...

Solution Summary

The solution provides a definition of abritrage, then discusses the various types of merger arbitrage in use today. The mechanics of each type, their potential use, examples of use, and advantages and disadvantages are also discussed. Multiple references are provided.