Final_1.pdf

So, how do we go about trading on this disparity? This is indeed the
topic for the next section, Trading Strategy.

Trading Strategy

An arbitrageur may take on a position any time during the course of the
merger process. This would, however, be dictated by the risk and return
characteristics of the deal. The typical trade executed is to short the bidder
shares (sell high), buy the target shares (buy low), and pocket the spread.
When the deal is completed, the target shares owned are exchanged for bid-
der shares. These bidder shares are then applied to cover the short position.

Risk Arbitrage Mechanics 147

FIGURE 9.1A Price Dynamics (INTC–LEVL).

020406080

40

50

60

70

100 120

30

20

INTC (adjust close)

LEVL (close)

FIGURE 9.1B Spread (INTC–LEVL).

02040 60 80 100 120

4

5

Spread

2

3

1

0