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Explanation:
B is correct. In a merger arbitrage transaction on a share-based exchange, the manager should go long the undervalued target and go short the acquirer if they believe the acquisition will be completed.
Arbitrage Opportunity: ACQ is currently undervalued by CNY 1 per share (CNY 10 implied value vs. CNY 9 market price).
Trade Rationale:
Why Other Options Are Incorrect:
Profit Mechanism: As the acquisition completes, the spread between ACQ's market price (CNY 9) and its implied value (CNY 10) should converge, generating profit.
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A portfolio manager of a merger arbitrage fund is reviewing a pending acquisition, in which Company STZ has offered to pay 1/3 of a share of its stock for every share of Company ACQ. The stock of company STZ is currently trading at CNY 30 per share and the stock of company ACQ is currently trading at CNY 9 per share. The manager believes with a high level of certainty that the acquisition will be completed. Which of the following trades would be most appropriate for the manager to establish to reflect this view?
A
Take a leveraged long position in 100,000 call options on Company ACQ.
B
Buy 100,000 shares of Company ACQ and short 30,000 shares of Company STZ.
C
Buy 30,000 shares of Company STZ and short 100,000 shares of Company ACQ.
D
Sell 100,000 puts on Company ACQ with a strike of CNY 9 and buy 30,000 calls on Company STZ with a strike of CNY 30.