As mentionned in a previous post, BCE shares present a big arbitrage profit opportunity. At the time of my first mention, the shares traded at $39.79 on the TSX with an offer price of $42.75 to be paid in December. Today, BCE shares closed at $39.13 after reaching a day's low of $38.27.
This drop is most probably linked to fears about the financing of the deal. Indeed, after Fannie and Freddie, now Lehman is worrying the markets. People are scared that the crisis is far from over and doubt more and more that BCE's buyers will be able to get the financing. After all, it is the largest takeover in Canadian history.
Stock Market Investment Partner will leave you the task of determining if the risk-reward relation of this arbitrage is right for your own financial situation.
Showing posts with label Profit. Show all posts
Showing posts with label Profit. Show all posts
Thursday, September 11, 2008
Friday, September 5, 2008
Arbitrage profit opportunity
Let's take a look at a low risk way to make money on the stock market: arbitrage. An arbitrage opportunity exists when a close to riskless profit can be obtained by an investor. You may be wondering why this opportunity exists if there is no risk. As mentionned, there is "close" to no risk in most arbitrage trades. If you want riskless investments, don't use the stock market.
Let's look at a current situation. Canadian telecom powerhouse BCE (Bell Canada) is being acquired at a price of 42.75 C$. However, today on the TSX (Toronto Stock Exchange), it trades at 39.79 C$. By the way, BCE also trades on the NYSE. Regulatory approaval has been given and the buyers are confident about getting the financing. So why is it not trading nearer the offer price? One part of the answer is that as long as the 42.75 C$ isn't in your pocket the market considers that there is some risk. In other words, the market participants are protecting themselves in case something goes wrong. This protection is the lower trading price. The second part of the answer is time value of money. The deal is supposed to close in December, so money invested in BCE shares now can't be invested elsewhere. Investors need to be rewarded for that sacrifice. A lower stock price does that.
Let's do the math: In 3 months, you will get a 7.44% raw return on your investment. Not bad for a "low-risk" arbitrage (I stress that no stock is riskless). As always, you should do your own research and see if this is a good trade for your situation.
Arbitrage opportunities can be helpful stock market investments during difficult volatile markets.
Let's look at a current situation. Canadian telecom powerhouse BCE (Bell Canada) is being acquired at a price of 42.75 C$. However, today on the TSX (Toronto Stock Exchange), it trades at 39.79 C$. By the way, BCE also trades on the NYSE. Regulatory approaval has been given and the buyers are confident about getting the financing. So why is it not trading nearer the offer price? One part of the answer is that as long as the 42.75 C$ isn't in your pocket the market considers that there is some risk. In other words, the market participants are protecting themselves in case something goes wrong. This protection is the lower trading price. The second part of the answer is time value of money. The deal is supposed to close in December, so money invested in BCE shares now can't be invested elsewhere. Investors need to be rewarded for that sacrifice. A lower stock price does that.
Let's do the math: In 3 months, you will get a 7.44% raw return on your investment. Not bad for a "low-risk" arbitrage (I stress that no stock is riskless). As always, you should do your own research and see if this is a good trade for your situation.
Arbitrage opportunities can be helpful stock market investments during difficult volatile markets.
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