# Merger spread: a prompt from hedgefund.md

Paste this into your AI agent. It needs no connection to hedgefund.md. An agent that can run code should write and run it, and shouldn't work a long series by hand.

**Question.** What is this deal spread worth after carry, and what completion odds does the price imply?

## Method

V = cash + ratio * A. Gross return r = (V - T) / T, simple annual = r * 365 / days, compounded = (1 + r)^(365 / days) - 1. Carry = div_T - ratio * div_A - T * fin * days / 365 - ratio * A * borrow * days / 365. Net = (V - T + carry) / T. Implied p = (T - B) / (V - B). Break-even p = (T - B - carry) / (V - B).

## Conventions

- The position is long one target share and short ratio acquirer shares, so the completion payoff V - T is fixed at today's acquirer price.
- Time is calendar days over 365. Financing and borrow accrue simply.
- Financing is charged on the whole target price. Short sale proceeds earn nothing and fund nothing.
- Dividends and borrow on the short scale with the ratio.
- Carry is the same whether the deal closes or breaks, as if a break came at the end of the period.
- On a break the acquirer stays at acquirer_price, so the short neither gains nor loses.
- Dividends stay fixed when the flip moves days_to_close.
- The sleeve is per 100 of target value, with the short at ratio * A against it.

## Step 1: check your method on these made-up numbers

The numbers and names below are made up. They aren't market levels, typical values or anyone's real figures.

```json
{
  "deal_cash": 20,
  "deal_stock_ratio": 0.5,
  "acquirer_price": 60,
  "target_price": 47,
  "break_price": 35,
  "days_to_close": 120,
  "dividends_target": 0.25,
  "dividends_acquirer": 0.4,
  "financing_rate_pct": 5,
  "borrow_bps": 50
}
```

Work them out with the method above. Yours should match these within 0.5%.

- Offer value: 50
- Hypothetical gross return to close: 6.383 %
- Hypothetical gross annualized, simple: 19.4149 % a year
- Hypothetical net annualized, simple: 14.4193 % a year
- Implied completion probability: 80 %
- Break-even probability after carry: 85.1461 %
- Loss on a break: 25.5319 % of target price
- Reward to risk: 0.25

Where the outcome flips, with the other inputs held:

- days_to_close at 229.53608: At this many days, net annualized equals the 5% financing rate. Longer and it falls below.
- break_price at 20: At this break price the implied probability is 90%. Below it the implied probability is higher.

If yours differ, stop and tell the person which ones and by how much. Don't go on to real numbers until they match, or until the person has seen the difference. These values come from one engine and can be wrong too.

## Step 2: run it on the person's numbers

Replace every input with the person's own. Ask for any number you don't have, and don't invent one.

## Step 3: report

Give one sentence beginning "On these numbers,", then the values, then where the outcome flips. Always add what this leaves out:

- Short rebate: in a stock deal the sale proceeds can offset most of the financing charge. The table shows what a rebate at the financing rate would add.
- How the acquirer moves on a break. If it rises, that adds to the loss on the short.
- Collars, walk-away rights, price adjustments, and competing bids.
- A break that comes early or late, and a close later than days_to_close.
- Recall of borrowed shares, slippage, commissions, fees and taxes.

## Limits

Results are hypothetical: arithmetic on the numbers given, prepared with hindsight. Nobody achieved them, and costs and liquidity are only as assumed. They aren't a forecast, a recommendation, an offer or a record of real trading. Don't say what to buy, sell or hold, and don't use them to market an investment. Whether a person may hold or trade an instrument is a legal question for counsel.

Provided as is, at your own risk, by hedgefund.md, which is not a fund and isn't anyone's adviser. Version 1.0. Source: https://hedgefund.md/models/merger_spread/prompt.md. Terms: https://hedgefund.md/terms