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Simple English definitions for legal terms
risk arbitrage
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A quick definition of risk arbitrage:
Risk arbitrage is a way of making money by buying and selling stocks of companies that are likely to merge or be taken over. It involves buying the stock of the company that is being targeted for acquisition and selling the stock of the acquiring company at the same time. This is done in the hope of making a profit from the difference in the stock prices. It is called "risk" arbitrage because there is no guarantee that the merger or acquisition will actually happen, and the stock prices may not move in the expected direction.
A more thorough explanation:
Risk arbitrage is a type of arbitrage where an investor buys and sells assets that are not necessarily equivalent, but are likely to become equivalent in the future. This is often done in the context of a corporate merger or takeover, where an investor buys stock in a company that is being targeted for acquisition and sells stock in the acquiring company.
For example, if Company A announces that it will acquire Company B, an investor might buy stock in Company B and sell stock in Company A. The hope is that the price of Company B's stock will rise as the acquisition progresses, while the price of Company A's stock will fall. If the investor times the trades correctly, they can make a profit from the difference in prices.
Another example of risk arbitrage is convertible arbitrage, where an investor buys a security that can be converted into another security within a reasonable time frame, and simultaneously sells the second security. The hope is that the price of the first security will rise, making the conversion more valuable, while the price of the second security will fall.