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:

Parallel

A circuit configuration where components are connected across common points or junctions, allowing current to divide and flow through multiple paths.

Series

Components in an electrical circuit are said to be in series if they are connected along a single path, so the same current flows through all of the components.

Inductive Reactance

The opposition to alternating current flow due to the inductance of a component or circuit, measured in ohms.

Reactive Power

Also called wattless power. Calculated by multiplying reactive voltage by reactive current. Can be produced by inductive or capacitive loads.