5. On 6/30/20, at 7AM, Firm Green and Firm Red announced a merger agreement. The merger...

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5. On 6/30/20, at 7AM, Firm Green and Firm Red announced a merger agreement. The merger was expected to be completed by June 2021. If the merger is completed, then: • Each class A share of Firm Red can be swapped for 3.5 shares of Firm Green; • Each class B share of Firm Red can be swapped for 4.2 shares of Firm Green; and • Each class C share of Firm Red can be swapped for 7.7 shares of Firm Green. On 6/30/20 at 4PM: • Shares of Firm Green closed at a positive price; • Class A shares of Firm Red closed at $105 (per share); • Class B shares of Firm Red closed at $126 (per share); and • Class C shares of Firm Red closed at $154 (per share). Based only on the information above, can you identify a risk arbitrage opportunity arising from the announcement of the merger agreement? If your answer is YES, please note: • The stock/class of shares and the amount of shares that you are buying; • The stock/class of shares and the amount of shares that you are short-selling; and • The profit arising from the risk arbitrage opportunity. If your answer is NO, please explain why you cannot find a risk arbitrage opportunity. 5. On 6/30/20, at 7AM, Firm Green and Firm Red announced a merger agreement. The merger was expected to be completed by June 2021. If the merger is completed, then: • Each class A share of Firm Red can be swapped for 3.5 shares of Firm Green; • Each class B share of Firm Red can be swapped for 4.2 shares of Firm Green; and • Each class C share of Firm Red can be swapped for 7.7 shares of Firm Green. On 6/30/20 at 4PM: • Shares of Firm Green closed at a positive price; • Class A shares of Firm Red closed at $105 (per share); • Class B shares of Firm Red closed at $126 (per share); and • Class C shares of Firm Red closed at $154 (per share). Based only on the information above, can you identify a risk arbitrage opportunity arising from the announcement of the merger agreement? If your answer is YES, please note: • The stock/class of shares and the amount of shares that you are buying; • The stock/class of shares and the amount of shares that you are short-selling; and • The profit arising from the risk arbitrage opportunity. If your answer is NO, please explain why you cannot find a risk arbitrage opportunity.

Answer rating: 100% (QA)

Yes there is a potential risk arbitrage opportunity based on the information provided Arbitrage stra... View the full answer