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Arbitrage firm

by | Aug 16, 2021 | Assignment

An arbitrage firm (A) notes that a bidder (B) whose stock is selling at $30 makes an offer for a target (T) selling at $40 to exchange 1.5 shares of B for 1 share of T. Shares of T rise to $44; B stays at $30. A sells 1.5 B short for $45 and goes long on T at $44. One month later the deal is completed with B at $30 and T at $45. What is A’s dollar and percentage annualized gain, assuming a required 50% margin and 8% cost of funds on both transaction?

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