CFA Practice Question

There are 139 practice questions for this study session.

CFA Practice Question

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.

User Contributed Comments 1

User Comment
ankurwa10 basically, you buy cheap and sell high.

You know that the firm that is being acquired may go up, buy cheap(er) and sell the stock of the acquirer (as the price already factors in the merger )
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