Which of the following statements 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)It is not true arbitrage 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.

Question

Quizplus · Accepted Answer

The statement in choice A is false because the uncertainty about whether the takeover will succeed actually increases the volatility of the stock price, not reduces it. This increased volatility is what creates the opportunity for speculation.

Which of the Following Statements Regarding Risk Arbitrage Is FALSE