Risk arbitrage is a trading strategy that seeks to capitalize on the price differences that arise during corporate events, such as mergers and acquisitions. This approach typically involves buying shares of the target company and short-selling shares of the acquiring company, aiming to profit from the eventual convergence of prices as the market adjusts to the outcome of the event. Understanding risk arbitrage also requires familiarity with factors like market conditions, transaction costs, and regulatory implications that can affect potential profits and risks.
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