Risk arbitrage: Risk arbitrage, also known as merger arbitrage, is a high-risk strategy frequently used by hedge funds and other investors. It involves buying the stock of the company being acquired in a merger, while selling short the stock of the acquirer. Most acquisitions are made at a premium to the stock price of the acquired company, so when a merger is announced, the target company's stock tends to jump higher. However, it does not always reach the merger price, leaving a spread. It is this spread that arbitrageurs try to capture. However, there are a number of uncertainties in the completion of a merger, which are the cause of the spread in the first place, making this a risky strategy. Thus, it is not arbitrage, or the pursuit of risk-free profit, in the classical sense. However, the arbitrage spread is thus a good barometer of the market's opinion of the likelihood of a deal's closing.
