mall – ubid arbitrage
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MALL – UBID arbitrageCreative Computers
UbidArbitrage – how it works
Hidden dangers
MALL-UBID arbitrage 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 !!!
MALL-UBID arbitrage 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 !!!
MALL-UBID arbitrage 4
Game PlanDec 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 arbitrage 5
Technical Details Long Position
Short Position
Assets Liabilities and Equity
MALL (Long) value $ 22.75 Loan from broker*** $ 11.38
Cash* Equity (Net Worth) $ 11.37
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 arbitrage 6
Technical Details Joint Balance Sheet
* with broker
** cash collateral
*** long margin loan
• What Happens Next?...
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
MALL-UBID arbitrage 7
Figure 1Creative Computers/UBID Arbitrage
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12/1/1998 1/1/1999 2/1/1999 3/1/1999 4/1/1999 5/1/1999 6/1/1999
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UBID (x .72)
CreativeComputers
MALL-UBID arbitrage 8
Figure 1Creative Computers/UBID Arbitrage
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12/1/1998 1/1/1999 2/1/1999 3/1/1999 4/1/1999 5/1/1999 6/1/1999
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UBID (x .72)
CreativeComputers
Invest12/9/98
MALL-UBID arbitrage 9
Figure 1Creative Computers/UBID Arbitrage
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12/1/1998 1/1/1999 2/1/1999 3/1/1999 4/1/1999 5/1/1999 6/1/1999
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UBID (x .72)
CreativeComputers
Invest12/9/98
MARGIN CALL, 12/18/98
MALL-UBID arbitrage 10
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
Assets Liabilities and Equity
MALL (Long) value $ 28.88 Loan from broker*** $ 11.38
UBID cash proceeds* $ 25.55 UBID (Short) value $ 38.03
Short margin** $ 12.78 Equity $ 17.79
MALL-UBID arbitrage 11
Figure 1Creative Computers/UBID Arbitrage
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12/1/1998 1/1/1999 2/1/1999 3/1/1999 4/1/1999 5/1/1999 6/1/1999
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UBID (x .72)
CreativeComputers
Invest12/9/98
MARGIN CALL #2, 12/21/98
MALL-UBID arbitrage 12
Figure 1Creative Computers/UBID Arbitrage
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12/1/1998 1/1/1999 2/1/1999 3/1/1999 4/1/1999 5/1/1999 6/1/1999
$ pe
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UBID (x .72)
CreativeComputers
Invest12/9/98
MARGIN CALL #3, 12/22/98
MALL-UBID arbitrage 13
Figure 1Creative Computers/UBID Arbitrage
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12/1/1998 1/1/1999 2/1/1999 3/1/1999 4/1/1999 5/1/1999 6/1/1999
$ pe
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UBID (x .72)
CreativeComputers
Invest12/9/98
MARGIN CALL #4, 12/23/98
MALL-UBID arbitrage 14
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
Assets Liabilities and Equity
MALL (Long) value $ 59.68 Loan from broker*** $ 11.38
UBID cash proceeds* $ 25.55 UBID (Short) value $ 134.59
Short margin** $ 12.78 Equity $ (47.96)
MALL-UBID arbitrage 15
Figure 1Creative Computers/UBID Arbitrage
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12/1/1998 1/1/1999 2/1/1999 3/1/1999 4/1/1999 5/1/1999 6/1/1999
$ pe
r sha
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UBID (x .72)
CreativeComputers
Invest12/9/98
MALL-UBID arbitrage 16
Figure 1Creative Computers/UBID Arbitrage
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12/1/1998 1/1/1999 2/1/1999 3/1/1999 4/1/1999 5/1/1999 6/1/1999
$ pe
r sha
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UBID (x .72)
CreativeComputers
Invest12/9/98
MALL-UBID arbitrage 17
Figure 1Creative Computers/UBID Arbitrage
$0
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12/1/1998 1/1/1999 2/1/1999 3/1/1999 4/1/1999 5/1/1999 6/1/1999
$ pe
r sha
re
UBID (x .72)
CreativeComputers
Invest12/9/98
MALL-UBID arbitrage 18
How It Played Out…Dec 9 1998 Jun 8 1999
Investment Payoff
Long 1 share MALL $ 22.75 $ 8.69
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
Cash infusions $ 103.26 $ 103.26
Net (equity) $ 127.41 $ 138.75
8.90% <= 6m ROI
MALL-UBID arbitrage 19
How It Could Have Played Out…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
Cash infusions $ 103.26 $ 103.26
Net (equity) $ 127.41 $ 130.07
2.08% <= 6m ROI
MALL-UBID arbitrage 20
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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