Question
Two share-classes of the same stock are expected to be unified within a short period of time (less than one year). Before the announcement is
Two share-classes of the same stock are expected to be unified within a short period of time (less than one year). Before the announcement is made, the two share-classes trade at $50 (A) and $60 (B) respectively. You do not expect any other major events to take place between now and the unification date that might differentially affect the stocks. In that case, which of the following is the most likely to be true:
A. | A hedge fund can make an arbitrage profit with little horizon risk by buying A and short-selling B after the announcement date. This strategy does not have horizon risk, in which case it is (nearly) risk-free. | |
B. | A hedge fund can make an arbitrage profit with little horizon risk by buying A and short-selling B on the announcement date, but before other investors enter the same trade. This strategy does not have horizon risk, in which case it is (nearly) risk-free. | |
C. | A hedge fund can make an arbitrage profit by buying A and short-selling B on the announcement date, but before other investors enter the same trade. This strategy does, however, have significant horizon risk, in which case the arbitrage profits are not risk-free. | |
D. | A hedge fund can make an arbitrage profit by buying A and short-selling B on the after the announcement date. This strategy does, however, have significant horizon risk, in which case the arbitrage profits are not risk-free. |
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