Risk Arbitrage

Risk arbitrage, also known as merger arbitrage, is an investment strategy that seeks to profit from the price differences that occur before and after a merger or acquisition announcement. In this strategy, an investor typically buys shares of the target company (which is expected to rise) and may short-sell shares of the acquiring company (which might fall). The investor profits if the merger or acquisition is completed successfully. However, the strategy carries risks if the deal falls through, leading to potential losses.

Example

An investor buys shares of a target company after a merger is announced, betting that the stock price will rise as the deal goes through, while short-selling the acquiring company’s stock to hedge the risk.