CFA Level I · CFA Level I Exam · Hedge Funds
A merger arbitrage manager holds a long position in a target trading at a wide spread to the announced offer price. The spread is most likely to widen if the market perceives that:
The spread most likely widens if regulators are increasingly likely to block the deal. Higher perceived risk of failure pushes the target price down toward its pre-deal value, while an earlier closing or a rival bid would raise the target price and narrow the spread.
- Athe deal's closing date will be brought forward
- Bregulators are increasingly likely to block the transactionCorrect
- Ca competing bidder may make a higher offer
Explanation
A wider spread means the market sees a higher chance of deal failure, so the target falls toward its stand-alone price. An earlier close or a rival bid pushes the target price toward or above the offer, narrowing the spread.
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