1. Creative Computers Ubid Arbitrage – how it works Hidden dangers
MALL-UBID arbitrage
MALL – UBID arbitrage
Creative Computers
Ubid
Arbitrage – how it works
Hidden dangers

2. MALL vs. UBID June 8, 1999 December 9, 1998
MALL-UBID arbitrage
MALL vs. UBID
June 8, 1999
Each Creative Computers shareholder receives UBID share for 1 MALL share
December 9, 1998
MALL price is $22.75
UBID price is $
0.7159*$ = $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 shares of UBID at $25.55
This position is guarantees a “riskless” profit on June 8, 1999 !!!
MALL-UBID arbitrage

4. Game Plan Dec 9 1998 Jun 8 1999 Investment Payoff Long 1 share MALL
MALL-UBID arbitrage
Game Plan
Dec
Jun
Investment
Payoff
Long 1 share MALL $ $
Short shares of UBID
$ (25.55)
Short Cash Proceeds* $
Long Margin Loan (cash)
$ (11.38)
$ (11.77)
Short Margin Collateral (cash) $ $
Net (equity) $ $
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. Liabilities and Equity Liabilities and Equity
MALL-UBID arbitrage
Technical Details
Long Position
Short Position
Assets
Liabilities and Equity
MALL (Long) value $
Loan from broker*** $
Cash*
Equity (Net Worth) $
Assets
Liabilities and Equity
UBID cash proceeds* $
UBID (Short) value $
Cash margin** $
Equity (Net Worth) $
MALL-UBID arbitrage

6. Liabilities and Equity
MALL-UBID arbitrage
Technical Details
Joint Balance Sheet
* with broker
** cash collateral
*** long margin loan
What Happens Next?...
Assets
Liabilities and Equity
MALL (Long) value $
Loan from broker*** $
UBID cash proceeds* $
UBID (Short) value $
Short margin** $
Equity $
MALL-UBID arbitrage

7. MALL-UBID arbitrage

8. MALL-UBID arbitrage

9. MALL-UBID arbitrage

10. Liabilities and Equity
MALL-UBID arbitrage
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 $
Loan from broker*** $
UBID cash proceeds* $
UBID (Short) value $
Short margin** $
Equity $
MALL-UBID arbitrage

11. MALL-UBID arbitrage

12. MALL-UBID arbitrage

13. MALL-UBID arbitrage

14. Liabilities and Equity
MALL-UBID arbitrage
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 $
Loan from broker*** $
UBID cash proceeds* $
UBID (Short) value $
Short margin** $
Equity
$ (47.96)
MALL-UBID arbitrage

15. MALL-UBID arbitrage

16. MALL-UBID arbitrage

17. MALL-UBID arbitrage

18. How It Played Out… Dec 9 1998 Jun 8 1999 Investment Payoff
MALL-UBID arbitrage
How It Played Out…
Dec
Jun
Investment
Payoff
Long 1 share MALL $ $
Short shares of UBID
$ (25.55) $
Short Cash Proceeds* $ $
Long Margin Loan (cash)
$ (11.38)
$ (11.77)
Short Margin Collateral (cash) $ $
Cash infusions $ $
Net (equity) $ $
8.90%
<= 6m ROI
MALL-UBID arbitrage

19. How It Could Have Played Out…
MALL-UBID arbitrage
How It Could Have Played Out…
Dec
Jun
Investment
Payoff
Long 1 share MALL $ $
Short shares of UBID
$ (25.55)
Short Cash Proceeds* $ $
Long Margin Loan (cash)
$ (11.38)
$ (11.77)
Short Margin Collateral (cash) $ $
Cash infusions $ $
Net (equity) $ $
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
MALL-UBID arbitrage