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

Battle Count: 110

Highly relevant for quantitative trading in the context of large block trades, M&A share accumulation strategies, and derivative pricing with market impact. The paper directly addresses optimal execution under price impact, statistical arbitrage detection, and manipulation risk in cash-settled vs. physically-delivered contracts. The TRS and collar contract analysis is directly applicable to institutional trading desks handling M&A-related derivatives.

The core stochastic control problem requires solving 3D HJB PDEs (time, inventory, stock price) numerically via finite difference methods. The semi-implicit operator splitting scheme is standard but requires careful implementation for stability. Collar and TWAP extensions add complexity (TWAP introduces a 4D state space before transformation). Closed-form solutions exist only for the simplest linear case with zero drift and zero rate. Calibration of market impact parameters (b, l, α) from real data is non-trivial.

The paper provides detailed parameter settings (Table 4.1), closed-form solutions for special cases (Appendix A), and a complete numerical algorithm (Appendix B, Algorithm 1) with discretization parameters. However, no code repository is provided. The numerical method (semi-implicit operator splitting FDM) is well-described but implementation details for collar and TWAP contracts require additional effort.