Which of the Following Questions Regarding Risk Arbitrage Is FALSE

question 46

Multiple Choice

Which of the following questions 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) However, it is not a true arbitrage opportunity because there is a risk that the deal will not go through. If the takeover did not ultimately succeed, the risk-arbitrageur would eventually have to unwind his position at whatever market prices prevailed.

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Definitions:

Not-for-profit Organization

An entity that operates for purposes other than generating profit for owners or shareholders, focusing instead on a mission or specific group of people.

Equity Method

An accounting approach used for recording investments in associate companies where the investment is initially recognized at cost and adjusted thereafter for the post-acquisition change in the investor's share of the net assets of the investee.

Profit-Oriented Entity

A business whose primary goal is to generate profits rather than focusing on other goals such as social impact or environmental sustainability.

Fair Value

The financial return from disposing of an asset or expense of transferring a liability in a systematic transaction with market entities at the point of measurement.