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For an arbitrageur entering a basis trade, the primary risk is that the basis becomes more negative at the same time as their funding costs widen.
is akin to giving a free call option to appraisal arbitrageurs. (74)
(101) According to defense attorneys, appraisal arbitrageurs "are taking advantage of the flexibility of Transkaryotic," (102)
As such, deal failure usually imposes losses on risk arbitrageurs.
The welfare analysis of Gromb and Vayanos (2002) shows that arbitrageurs may not take on an optimal level of risk, in part because they fail to internalize the effect on prices of changing their positions.
For an arbitrageur trading for her own account, we can presume the explanation for a failed investment is observable.
into share price because fewer risk arbitrageurs find it worthwhile to
The arbitrageur would sell call 1, buy call 2, and invest the balance in a Treasury bill earning the risk-free rate.
A true venture capitalist operates as a knowledge arbitrageur, buying assets that the market lacks the knowledge to value fully, and selling them as this knowledge asymmetry with the market evaporates.
Boesky was the emblematic risk arbitrageur of the 1980s, and Lincoln's examiners regarded the Boesky investment as extraordinarily risky.