The purpose of a case is to challenge you to identify the key issues of the decision situation at hand. Here are a few pointers:
Describe how does risk arbitrage work? What are the risks and opportunities associated with this strategy?
Green Circle shorted 312K shares of Abbot and longed 260K Alza shares. How did they determine the appropriate relative position sizes? What can you say about the potential returns and expected returns on investment?
Why would you expect positive excess returns from a risk arb strategy? Why wouldn't market efficiency prevent such profit from persisting? Do you believe the strategy will be profitable in the long run?
How could the put option discussed at the end of the case potentially help Smith? Does the put increase or decrease the risk of the position? Does it increase or decrease the expected returns?
As Chris Smith, would you close teh position, invest more, or hold on? If you kept the position open, would you use options to hedge?
Please, do not answer these questions one by one. Instead, use them only as ways to prime your own analysis. You may then organize and draft your results in whichever way you see fit. If you feel that you have to make any assumptions, please do it by stating them clearly in your report. I expect the report to be no longer than 7 pages + Excel spreadsheets (if necessary). I would appreciate 12pt font.
Mark Mitchell and Todd Pulvino, "Characteristics of Risk and Return in Risk Arbitrage,", JF 2001.
Malcolm Baker and Serkan Savasoglu, "Limited Arb in M&A", JFE, 2002.