Hi
I don't really understand the example given on risk arbitrage in chapter 5 of the notes. The example is:
Suppose a hedge fund manager believes that A plc is planning to acquire a certain target company, T plc, by offering one A share for each T share. The manager will take a long position in (ie buys) the shares of T and goes short in the shares of A. If the takeover goes ahead, the price of T will converge upwards towards the price of A. By taking a long position in one share and a short position in the other, the manager gets the profit from the relative movement of the share prices and is immune to the movement of the market as a whole.
Why does the fund manager need to take a short position in A here to make profit? Is it in case the merger doesn't go ahead? Some additional explanation/ an alternative example would be much appreciated!
Thanks
I don't really understand the example given on risk arbitrage in chapter 5 of the notes. The example is:
Suppose a hedge fund manager believes that A plc is planning to acquire a certain target company, T plc, by offering one A share for each T share. The manager will take a long position in (ie buys) the shares of T and goes short in the shares of A. If the takeover goes ahead, the price of T will converge upwards towards the price of A. By taking a long position in one share and a short position in the other, the manager gets the profit from the relative movement of the share prices and is immune to the movement of the market as a whole.
Why does the fund manager need to take a short position in A here to make profit? Is it in case the merger doesn't go ahead? Some additional explanation/ an alternative example would be much appreciated!
Thanks