Merger Arbitrage Risk Premia

Once a merger is announced, the target's stock price has a binary payoff, depending on whether the merger succeeds or fails. Because of this transformation, many existing holders of the target's stock may be willing to sell their shares shortly after the announcement of the merger rather than waiting for the deal to close with limited further upside. By offering a form of insurance against the deal not closing and providing liquidity to shareholders who want to sell, arbitrageurs capture a risk premium. The strategy is currently implemented using primarily equity index futures and equities from the following countries/regions: U.S., U.K., Continental Europe, Ireland, Japan, Australia, New Zealand and Canada.

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Future Value Capital LLP
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