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
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.