risk arbitrage

Risk arbitrage, also known as merger arbitrage, is a financial strategy that capitalizes on the price difference of a company's stock before and after a merger or acquisition. Risk arbitrageurs aim to profit from the expected price movement resulting from such corporate events.12

This strategy involves buying a target company's stock after a takeover attempt is announced, as the price typically rises to near the offered price. The arbitrageur then sells the stock after the merger or takeover is completed. The primary risk is that the merger or takeover attempt may fail, causing the stock price to fall and resulting in losses for the arbitrageur. This practice can be illegal if it involves insider trading, as seen with Ivan Boesky.1