The merger arbitrage strategy is to ______ the stock of the company being acquired and ______ the stock of the acquiring company when the merger/acquisition is announced.

A. long, short
B. short, long
C. short, short

Correct Answer: A

Merger arbitrage is an investment strategy that simultaneously buys and sells the stocks of two merging companies. When a company signals its intent to buy another company, the stock price of the target company typically rises, and the stock price of the acquiring company typically declines. However, the stock price of the target company usually remains somewhere below the acquisition price - a discount that reflects the market's uncertainty about whether the merger will truly occur. That's where merger arbitrageurs enter the picture.