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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UBID (x .72)

CreativeComputers

MALL-UBID arbitrage 8

Figure 1Creative Computers/UBID Arbitrage

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CreativeComputers

Invest12/9/98

MALL-UBID arbitrage 9

Figure 1Creative Computers/UBID Arbitrage

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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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CreativeComputers

Invest12/9/98

MARGIN CALL #2, 12/21/98

MALL-UBID arbitrage 12

Figure 1Creative Computers/UBID Arbitrage

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CreativeComputers

Invest12/9/98

MARGIN CALL #3, 12/22/98

MALL-UBID arbitrage 13

Figure 1Creative Computers/UBID Arbitrage

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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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CreativeComputers

Invest12/9/98

MALL-UBID arbitrage 16

Figure 1Creative Computers/UBID Arbitrage

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CreativeComputers

Invest12/9/98

MALL-UBID arbitrage 17

Figure 1Creative Computers/UBID Arbitrage

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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