FINN5333 Ubid
MALL – UBID arbitrage
Creative Computers
Ubid
Arbitrage – how it works
Hidden dangers
MALL vs. UBID
June 8, 1999
Each Creative Computers shareholder receives 0.7159 UBID share for 1 MALL share December 9, 1998
MALL price is $22.75
UBID price is $35.6875
0.7159*$35.6875 = $25.55
UBID is more expensive than MALL !!!
MALL-UBID arbitr
2
MALL – UBID arbitrage
December 9, 1998
Long 1 share of MALL at $22.75
Short 0.7159 shares of UBID at $25.55
This position is guarantees a “riskless” profit on June 8, 1999 !!!
MALL-UBID arbitr
3
Game Plan
Dec 9 1998
Jun 8 1999
Investment
Payoff
Long 1 share MALL
$
22.75
$
-
Short 0.7159 shares of UBID
$
(25.55)
$
-
Short Cash Proceeds*
$
25.55
$
25.55
Long Margin Loan (cash)
$
(11.38)
$
(11.77)
Short Margin Collateral (cash)
$
12.77
$
13.03
Net (equity)
$
24.15
$
26.81
11.00% <= 6m ROI
Interest on short proceeds**
0.00%
Margin loan interest - borrow
7.00%
Margin loan interest - lend
4.00%
* with broker
** rebate rate
MALL-UBID arbitr
4
Technical Details
Long Position
Assets
Liabilities and Equity
MALL (Long) value
Cash*
$ 22.75
Loan from broker***
$
11.38
Equity (Net Worth)
$
11.37
Short Position
Assets
Liabilities and Equity
UBID cash proceeds*
$ 25.55
UBID (Short) value
$
25.55
Cash margin**
$ 12.78
Equity (Net Worth)
$
12.78
MALL-UBID arbitr
5
Technical Details
Joint Balance Sheet
Assets
Liabilities and Equity
MALL (Long) value
$ 22.75
Loan from broker***
$
11.38
UBID cash proceeds*
$ 25.55
UBID (Short) value
$
25.55
Short margin**
$ 12.78
Equity
$
24.15
* with broker
** cash collateral
*** long margin loan
•
What Happens Next?...
MALL-UBID arbitr
6
MALL-UBID arbitr
7
MALL-UBID arbitr
8
MALL-UBID arbitr
9
Dec 18, 1998 – Margin Call
Joint Balance Sheet
Assets
Liabilities and Equity
MALL (Long) value
$ 28.88
Loan from broker***
$
11.38
UBID cash proceeds*
$ 25.55
UBID
Creative Computers
Ubid
Arbitrage – how it works
Hidden dangers
MALL vs. UBID
June 8, 1999
Each Creative Computers shareholder receives 0.7159 UBID share for 1 MALL share December 9, 1998
MALL price is $22.75
UBID price is $35.6875
0.7159*$35.6875 = $25.55
UBID is more expensive than MALL !!!
MALL-UBID arbitr
2
MALL – UBID arbitrage
December 9, 1998
Long 1 share of MALL at $22.75
Short 0.7159 shares of UBID at $25.55
This position is guarantees a “riskless” profit on June 8, 1999 !!!
MALL-UBID arbitr
3
Game Plan
Dec 9 1998
Jun 8 1999
Investment
Payoff
Long 1 share MALL
$
22.75
$
-
Short 0.7159 shares of UBID
$
(25.55)
$
-
Short Cash Proceeds*
$
25.55
$
25.55
Long Margin Loan (cash)
$
(11.38)
$
(11.77)
Short Margin Collateral (cash)
$
12.77
$
13.03
Net (equity)
$
24.15
$
26.81
11.00% <= 6m ROI
Interest on short proceeds**
0.00%
Margin loan interest - borrow
7.00%
Margin loan interest - lend
4.00%
* with broker
** rebate rate
MALL-UBID arbitr
4
Technical Details
Long Position
Assets
Liabilities and Equity
MALL (Long) value
Cash*
$ 22.75
Loan from broker***
$
11.38
Equity (Net Worth)
$
11.37
Short Position
Assets
Liabilities and Equity
UBID cash proceeds*
$ 25.55
UBID (Short) value
$
25.55
Cash margin**
$ 12.78
Equity (Net Worth)
$
12.78
MALL-UBID arbitr
5
Technical Details
Joint Balance Sheet
Assets
Liabilities and Equity
MALL (Long) value
$ 22.75
Loan from broker***
$
11.38
UBID cash proceeds*
$ 25.55
UBID (Short) value
$
25.55
Short margin**
$ 12.78
Equity
$
24.15
* with broker
** cash collateral
*** long margin loan
•
What Happens Next?...
MALL-UBID arbitr
6
MALL-UBID arbitr
7
MALL-UBID arbitr
8
MALL-UBID arbitr
9
Dec 18, 1998 – Margin Call
Joint Balance Sheet
Assets
Liabilities and Equity
MALL (Long) value
$ 28.88
Loan from broker***
$
11.38
UBID cash proceeds*
$ 25.55
UBID