Arbitrage Themed Business (2)

Another example:
Corporate merger arbitration. Warren Buffett disclosed this strategy as something used in his early days of fund management. It has been shown mainly because he believes that this opportunity does not exist anymore that many people have been aware of it.

A few weeks ago Microsoft offered to buy Yahoo, in the form of stock at $ 30 per share. On the announcement, Yahoo shares opened at approximately U.S. $ 25 and Microsoft at $ 34. Once the news hit, a truck load of traders started in YHOO purchase orders, and orders for short MSFT.

The strategy arbitration would something like this:
1. Shorting 1000 by selling shares of MSFT, which the trader claims of $ 34000, this serves the self-financing part.
2. Using the money that can now afford to buy shares of YHOO 1000 for $ 25000.
3. Once the prices of both stocks converge, the difference of $ 9000 becomes a risk free profit. The prices will converge if the merger is approved or, in this case, through price impact of arbitrageurs.