Ahajhas

b) One of the main risks in arbitrage is completion risk. In the case of a merger, sometimes the deal falls through after it has been initially announced for any number of reasons so arbitrageurs face the inherent risk of the deal not closing. An arbitrageur's objective when establishing a position is typically to maximize potential returns while hedging away risk until the point that the only risk left is completion risk.

Additionally, the arbitrageur faces the risk of receiving less than the gross spread due to a move in the stock's price between the time of the position establishment and the completion of the merger. One possible risk that arrives in such a situation is double price risk, which results from a deal that falls through and the residual price risk faced by an arbitrageur that shorts the acquiring company and goes long on the target company. Furthermore, a change in terms (ie. Exchange ratio in a stock-for-stock deal) may result in a necessary change of position or rebalancing that can result in high transaction costs for the arbitrageur.

In the case of the ABT and AZA deal, many risks arose. For example, the fact that the deal was based on a fixed-stock ratio opened up the possibility of risk due to price movements that could make ABT shares less valuable and potentially force the company to change the exchange ratio, which could dilute shares. Also, a potential conflict of interests and antitrust problem in the prostate cancer drug market due to the merger threatened the deal. Perhaps most threatening of all was the fact that Abbott was cited for manufacturing violations by the FDA and that Alza shareholders were not told about the problems, which represents a violation of securities laws.

2) a) Green Circle followed a rule that in order to avoid concentration risk, the long position