1.Youare a portfolio manager at LfA Partners, a well-known merger arbitrage fund. On October 29, 2020, you learn thatLVMHhas agreed to buy Tiffany & Co. (ticker symbol: TIF) for $131.50/share in an all cash deal. The transaction is expected to close in exactly three months' time.Youcall your trading desk, who tell you they can buy 100,000 shares of TIF for$130.81/share.

a)What is the "set up" trade you should execute to "arbitrage" this merger? Assuming the transaction closes on time and as expected what would be the effective anualized rate of return of thistrade?

b)Now imagine instead of paying all cash,LVMHdecides to offer 50% cash and 50%LVMHstock. Specifcally, investors will receive $65.75 and .14 shares ofLVMHfor each share ofTIF.How would this new deal change your trade merger arbitrage tradeset-up?

c)Yourtrader tells you you can shortLVMHat 403.80 euros per share. If the euro is trading at $1.1679/EUR, isLVMHnow offering you a better or worse deal than the all cash deal of $131.50/share? Explain youranswer.