Risk Arbitrage

AAA

DEFINITION of 'Risk Arbitrage'

A broad definition for three types of arbitrage that contain an element of risk:

1) Merger and acquisition arbitrage - The simultaneous purchase of stock in a company being acquired and the sale (or short sale) of stock in the acquiring company.

2) Liquidation arbitrage - The exploitation of a difference between a company's current value and its estimated liquidation value.

3) Pairs trading - The exploitation of a difference between two very similar companies in the same industry that have historically been highly correlated. When the two company's values diverge to a historically high level you can take an offsetting position in each (e.g. go long in one and short the other) because, as history has shown, they will inevitable come to be similarly valued.

INVESTOPEDIA EXPLAINS 'Risk Arbitrage'

In theory true arbitrage is riskless, however, the world in which we operate offers very few of these opportunities. Despite these forms of arbitrage being somewhat risky, they are still relatively low-risk trading strategies which money managers (mainly hedge fund managers) and retail investors alike can employ.

RELATED TERMS
  1. Reverse Cash-and-Carry-Arbitrage

    A combination of a short position in an asset such as a stock ...
  2. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  3. Hedge Fund

    An aggressively managed portfolio of investments that uses advanced ...
  4. Leveraged Recapitalization

    A corporate strategy in which a company takes on significant ...
  5. Long (or Long Position)

    1. The buying of a security such as a stock, commodity or currency, ...
  6. Stub

    The balance part of a check or receipt that is retained for record-keeping ...
Related Articles
  1. Arbitrage Squeezes Profit From Market ...
    Options & Futures

    Arbitrage Squeezes Profit From Market ...

  2. Are Derivatives Safe For Retail Investors?
    Options & Futures

    Are Derivatives Safe For Retail Investors?

  3. Trading The Odds With Arbitrage
    Options & Futures

    Trading The Odds With Arbitrage

  4. What happens to the stock prices of ...
    Investing

    What happens to the stock prices of ...

comments powered by Disqus
Hot Definitions
  1. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  2. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer ...
Trading Center