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

Author

Listed:
  • Emilio Barucci
  • Yuheng Lan
  • Daniele Marazzina

Abstract

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.

Suggested Citation

  • Emilio Barucci & Yuheng Lan & Daniele Marazzina, 2026. "Pricing and Hedging Financial Derivatives in Merger\&Acquisition Deals with Price Impact," Papers 2604.21581, arXiv.org.
    • Handle: RePEc:arx:papers:2604.21581
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    References listed on IDEAS

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    1. Peter Bank & Dietmar Baum, 2004. "Hedging and Portfolio Optimization in Financial Markets with a Large Trader," Mathematical Finance, Wiley Blackwell, vol. 14(1), pages 1-18, January.
    2. Tathagata Banerjee & Zachary Feinstein, 2019. "Price mediated contagion through capital ratio requirements with VWAP liquidation prices," Papers 1910.12130, arXiv.org, revised Feb 2021.
    3. Banerjee, Tathagata & Feinstein, Zachary, 2021. "Price mediated contagion through capital ratio requirements with VWAP liquidation prices," European Journal of Operational Research, Elsevier, vol. 295(3), pages 1147-1160.
    4. Bichuch, Maxim & Feinstein, Zachary, 2022. "A repo model of fire sales with VWAP and LOB pricing mechanisms," European Journal of Operational Research, Elsevier, vol. 296(1), pages 353-367.
    5. Pirrong, Craig, 2001. "Manipulation of Cash-Settled Futures Contracts," The Journal of Business, University of Chicago Press, vol. 74(2), pages 221-244, April.
    6. Gur Huberman & Werner Stanzl, 2004. "Price Manipulation and Quasi-Arbitrage," Econometrica, Econometric Society, vol. 72(4), pages 1247-1275, July.
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