Which of the Following Statements Regarding Risk Arbitrage Is False

question 1

Multiple Choice

Which of the following statements regarding risk arbitrage is false?

• A) Once a tender offer is announced, the uncertainty about whether the takeover will succeed reduces the volatility of the stock price. This uncertainty creates an opportunity for investors to speculate on the outcome of the deal without bearing the risk of volatility.
• B) Traders known as risk-arbitrageurs, who believe that they can predict the outcome of a deal, take positions based on their beliefs.
• C) A potential profit arises from the difference between the target's stock price and the implied offer price, and is referred to as the merger-arbitrage spread.
• D) It is not a true arbitrage opportunity if there is a risk that the deal will not go through. If the takeover does not ultimately succeed, the risk-arbitrageur will eventually have to unwind his position at whatever market prices prevailed.

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Definitions:

Nonoperating Income

Income that is derived from activities not related to a company's primary business operations.

Rent Revenue

The income earned from leasing out property or space to tenants over a specific period.

Loss

A decrease in net income that results from operating under normal business activities, often reflected when expenditures exceed revenues.

Net Income

The net financial gain or deficit for a company following the calculation of all income and outgoings.