Question of the Week

When an investor is watching a proposed corporate merger and buys the stock of the company that is the takeover target while selling the acquiring company’s stock short, he/she is engaging in:

a) risk arbitrage
b) naked stock transfers
c) covered stock transactions
d) conversion arbitrage

The correct answer is a.

A highly sophisticated investment strategy, risk arbitrage involves the buying of a company that is the likely takeover target in a merger; while simultaneously selling the stock of the company making the acquisition short. If the investor is right, he/she will make a profit on both directions. If wrong, he/she loses in both transactions.