Acme Company announces a merger agreement with Taco Company that will likely be completed in six months. Acme is offering 2 shares for every 1 shares of Taco. Your risk arb firm would like to arb the spread in the deal in these two thinly traded stocks. Set up the arb using 400,000 shares as your position in Taco.

Taco $18

Acme $10

Deal Spread is:

Which stock are you long and which are you short?

What is the arbitrage profit if Acme stock goes to $16 by the time the deal is completed?

What is the arbitrage profit if Acme stock goes to $8 by the time the deal is completed?