This question was already posted under the userID user8170. Reason being I could not access my account. Now I am able to login to my account I am reposting the question here and will delete it from the profile user8170 (no comments or answers were posted anyway).
I am trying to run a simple back test on a M&A strategy.
The idea is to buy the target company for the length of the deal and obviously hope to see a profit. The weight given to each deal is decided by the size of the deal.
Some of the deals are part cash, part equity in my study. I have a field in my data called 'Stock Exchange Ratio - Buyer Shares' (SER). This field is defined as the number of shares being issued by the acquirer to the target.
So for example if the acquirer called ABC is buying the target company called TAR in a part cash, part stock deal and the SER is 0.8. Then investors holding TAR will receive 0.8 shares of ABC for every TAR share they hold.
So when I have deals that are not 100% cash I will get extra equity exposure (from the acquirer) that I need to hedge as I understand it.
Rather than short every acquiring company and partly for simplicity I am going to short the MSCI World Index. I do not know how to calculate how much I need to hedge my portfolio against the index though? I have all the beta's for the acquiring companies.
Portfolio Acquirer Target Deal Size Weight Stock Exchange Ratio - Buyer Shares ABC DEF $1,000m 50% 0 MNO LMN $600m 30% 0.6 GHI QRS $400m 20% 2.5
The beta's for the 3 companies above are,
ABC 0.93 MNO 1.11 GHI 1.14