Risk Arbitrage Explained - NY Institute of Finance

[00:04] risk Arbitrage is related to Pure Arbitrage but unlike pure Arbitrage which is riskless or

[00:21] Arbitrage involves the buying and selling of two assets that have a correlation between each other but are not the same asset as you would have in a risk-free Arbitrage risk Arbitrage is a strategy

[00:36] Arbitrage risk Arbitrage is a strategy used by hedge funds and other investors in almost every Financial product category including equities fixed income category including equities fixed income swaps options and foreign exchange we're

[00:50] going to look at three strategies that are used in equity risk Arbitrage the first is mergers and Acquisitions Arbitrage which is where you

[01:03] Arbitrage which is where you buy the stock of the company that is the target the company that's going to be acquired so you buy the

[01:19] Target and then you sell the because two reasons you will make more money if the acquirer

[01:35] is forced to pay a higher price for the Target so in many cases where another bidder enters into a takeover the original acquir is forced to raise their bid so this is why you buy the Target stock the other way to

[01:52] profit is because generally when a company acquires another company it's paying too high a price and the value of it stock tends to go down so you're able to profit doubly from potentially the Target stock going up in price and the

[02:08] Target stock going up in price and the acquir stock going down in price this acquir stock going down in price this strategy Works fairly well unless the acquirer decides to back out and abandon the acquisition in which case the Target

[02:23] stock price would go down and the acquirer stock price would return to its previous level second strategy that we're going to look at is called a liquidation strategy this is not quite an Arbitrage

[02:39] in the sense of buying one security and selling another but it is just selling another but it is just buying stock once again and the thing that you're selling is potentially the entire qu company

[02:54] you're hoping that the company will be liquidated so you're buying the stock trying to get control of the company in the hopes that you can gain control

[03:06] Force out the existing management and then liquidate the company either by liquidating the individual assets of the company or by selling the whole company or by selling the whole company to another uh

[03:20] acquirer last strategy we're going to look at is pairs trading which is the most common type of risk Arbitrage and it involves just buying and selling two stocks that are in the same industry so they have a high correlation because

[03:36] they're in the same industry and you try to pick two stocks of more or less the same size company in the same industry and your objective here is [Music] buy the undervalued

[03:58] company and then sell the overvalued profitable if you are able to effectively be smarter than the market

[04:12] be able to say that the market is overpricing the company that you want to sell and it's underpricing the company that you want to