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A trading strategy that seeks to benefit from stock price movements driven by one company merging with or buying another company. A typical transaction involves shorting the stock of the buyer and purchasing the stock of the company being bought. The difference between the stock prices narrows as the transaction moves towards completion.
http://www.cmra.com/html/body_glossary.html
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Also called risk arbitrage, merger arbitrage involves shorting the stock of a purchaser, on the assumption that it will fall as the stock market evaluates the deal. The arbitrageur buys long positions in the takeover target on the assumption that the stock price will rise to meet the takeover premium. The risk is that a deal falls through, or is overruled by regulators.
http://www.advisor.ca/product/canHedge/article.jsp
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