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MALL – UBID arbitrage

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

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MALL – UBID arbitrage

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  1. MALL – UBID arbitrage Creative Computers Ubid Arbitrage – how it works Hidden dangers

  2. 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 !!!

  3. 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 !!!

  4. Game Plan

  5. Technical Details • Long Position • Short Position

  6. Technical Details • Joint Balance Sheet * with broker ** cash collateral *** long margin loan • What Happens Next?...

  7. Dec 18, 1998 – Margin Call • Joint Balance Sheet * with broker ** cash collateral *** long margin loan • Maintenance Equity Required: $18.63 • Cash Infusion Required: $0.84

  8. Dec 23, 1998 – Margin Call #4 • Joint Balance Sheet * with broker ** cash collateral *** long margin loan • Maintenance Equity Required: $55.30 • Cash Infusion Required: $103.26

  9. How It Played Out…

  10. How It Could Have Played Out…

  11. Bottom Line • Margin Trading and Short Selling amplify risk – be aware of margin calls • Even if your long-term position is sound, you may be adversely affected in the short-term – always carry cash cushion • Short-term adverse market move ruined LTCM in 1998, while their long-term bets were good

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