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Optimal Execution and Fees for M&A Derivatives with Price Impact

Article arXiv papers · Author: Emilio Barucci et al.
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Summary

The document studies how a broker should execute derivatives used in merger and acquisition transactions when trading affects market prices. It considers cash-settled and physically delivered agreements, including linear total return swaps, nonlinear collars, and contracts tied to average prices over time.

The authors derive execution strategies and fees using indifference utility arguments, with trades assumed to have linear market impact. They report that linear cash-settled contracts cost more and give brokers greater scope for manipulation or statistical arbitrage. Nonlinear and average-price contracts also face such exposure. The excerpt provides no quantitative results or detailed contract comparisons, and its conclusions are limited to the stated market impact model and contract types.

Key ideas

  • The analysis covers both cash-settled and physically delivered M&A derivatives.
  • It examines swaps, collars, and contracts based on average execution prices.
  • Optimal execution and contract fees are derived using indifference utility.
  • The model accounts for linear price effects caused by trading.
  • The authors identify manipulation and statistical arbitrage concerns across the contract types studied.

Tags

Derivatives pricingExecutionMarket microstructureArbitrage
Full text
# Pricing and Hedging Financial Derivatives in Merger\&Acquisition Deals with Price Impact


# Pricing and Hedging Financial Derivatives in Merger\&Acquisition Deals with Price Impact









We investigate the optimal execution of contracts that are used in merger\&acquisition deals. We consider cash-settled and physically delivered contracts between a broker and a counterpart. Contracts are linear (total returns swaps), nonlinear (collar contracts) or Asian type (TWAP based contracts). We derive the optimal execution strategy and the optimal fee through indifference utility arguments allowing for linear market effects of trades. We show that linear cash-settled contracts are more expensive and more exposed to manipulation/statistical arbitrages by the broker. Also nonlinear and Asian type contracts are exposed to these phenomena.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.