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To: Jeffry K. Smith who wrote (113204)	3/29/1999 5:10:00 PM
From: Marq Spencer	Respond to of 176387

Jeff, Let me try to describe arbitrage with a simple example. Say a company XYZ announces that it will buy another company, ABC, for $10 a share. The shares of ABC were trading at $6/sh previous to the announcement. Now there is a degree of uncertainty whether the deal will go through, so, ABC now trades at, say, $9/sh. It is the arbitrager (sp?) who is willing to take the risk of the deal falling through and is willing to buy at $9. Of course, the arb is hoping to make a buck once the deal closes. A more typical example is one where shares are used for exchange. So, is XYZ is buying ABC and will give every ABC chare holder one share of XYZ (for simplicity sake). And if XYZ is trading at $10, and ABC is trading at $9, the arbs will go long ABC and short the same number of shares of XYZ. When the deal concludes, they'll have pocketed a buck. However, if the deal falls apart, they eat it. You have similar scenarios when other equivalent positions trade at slightly different values - arbs take positions on the two sides to make money on the risk. The previous post was pointing out the artificially close prices of options that expire a year apart. Arbs may take advantage of that by buying one and writing the other. - Marq.

To: Jeffry K. Smith who wrote (113204)	3/29/1999 5:28:00 PM
From: PAL	Read Replies (1) \| Respond to of 176387

Jeff: arbitrage is the simulataneous buying and selling of the same or equivalent securities (or in different market) in order to profit from price discrepancy. Arbitrage can take many forms, and ususally only done by professionals in large volume to take advantage of that small price differential. It could be buying/selling stocks and option related, or as recently as the price discrepancy between Netscape and AOL (OK, that is a good example). Prior to the final go ahead by the government, you could buy Netscape cheaper than buying AOL outright. The deal was for each NSCP share will be exchanged for .45 share of AOL. But if you multiply AOL by .45, the result is higher than the price of NSCP. The reason is that there was still uncertainty whether the government would approve the merger. Arbitrageur (one that practice arbitrage) will take advantage of that price discrepancy by buying NSCP and shorting AOL. On option expiration day, there will be a lot of arbitrage tradings. Small investors do not get involved in arbitrage because the cost involved, lack of funds, infrastructures, commission etc. Hope that helps. Paul