Final_1.pdf

Step 3: Calculations
The average price upper bound for the five days, upperAvg= 85.5904

The average price lower bound for the five days, lowerAvg= 74.7976

The final price upper bound,

The final price lower bound,

Upper bound on number of target shares

=134413 shares (with 95% confidence)

Lower bound on number of target shares

=129,917 shares (with 95% confidence)

Note that in the preceding example, a volatility assumption is made for
the bidder stock. Therefore, a realistic value for the volatility leads to good
estimates. A reasonable approach to determining the volatility to use is to
look at the implied volatility of the options on the bidder stock and choose
the volatility corresponding to the contract with the most appropriate strike
and expiration.

Short Selling

As discussed in the introduction, the uptick rule makes it harder to short the
stock. Until some time ago, a trading technique called married putsallowed
the traders to sidestep the rules that prevented short sales when a stock’s
price was falling steadily. The strategy involved the following steps. First,
buy a deep-in-the-money put with the closest maturity date. Then, tender for

=× 100000

74 7976

60 0

.

.

=n

p

p

B

tgt

lower

=× 100000

80 6476

60 0

.

.

=n

p

p

B

tgt

upper

p

T N avg N lowerAvg

T

c

lower =

−+

=

().

74 7976.

p

T N avg N upperAvg

T

c

upper =

−+

=

().

80 6476.

166 RISK ARBITRAGE PAIRS