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

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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

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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

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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

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MALL-UBID arbitr

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MALL-UBID arbitr

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MALL-UBID arbitr

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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