You are a portfolio manager at LfA Partners, a well-known merger arbitrage fund. On October 29, 2020, you learn that LVMH has 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. You call your trading desk, who tells 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 annualized rate of return of this trade?

B.) Now imagine instead of paying all cash, LVMH decides to offer 50% cash and 50% LVMH stock. Specifically, investors will receive $65.75 and .14 shares of LVMH for each share of TIF. How would this new deal change your trade merger arbitrage trade set-up?

C.) Your trader tells you you can short LVMH at 403.80 euros per share. If the euro is trading at $1.1679/EUR, is LVMH now offering you a better or worse deal than the all cash deal of $131.50/share? Explain your answer.