Win win

Today I faced in the romanian market a standard situtation described in behavioural finance books. So, I have for the next 2 months the following 2 investment options:

1. SIFs having a potential between -20% and +20% in the next 2 months (personal estimation)

2. SCD having a minimum potential of +1,5% due to the takeover offer. Considering that we speak about pharmaceuticals and that the offered price is exactly the book value, it is possible that the offer will be improved.

Option 1 is a pure bet! Option 2 is as safe and brings as much as a bank deposit (1,5% in less than 2 months), but it offers the possibility to participate free of charge to a bet.

I am sure all the traders will be disgusted by my exercise and will choose immediatly option 1 saying "no risk, no fun". Option 2 is the dream of any portofolio manager - it brings a sure profit + a greater profit in case a certain event (takeover price increase) occurs.

I wonder why nobody from the romanian banking system noticed the anomaly? What are the romanian fund managers doing??

In any western market, if the offered price is 0.7 ron, the banks would immediatly put a huge bid above that price. How much above, it depends on the estimated probability that the offer will be increased. But in any case, the bid will not stay below the offered price. Currently the bid is so low that it even offers a chance to do an arbitrage with the money market (buying at .68 could bring a 2,3% netto in about 42 days - that would be a 19,9% per year). This means that buying below 0,69 you do a clasic arbitrage and win a bet for free.

If Sanofi-Aventis will raise its offer for SCD to a similar level to what Zentiva offered in 2005 for SCD, the potential gain is +100%!! Of course, the probability for this to happen is low, but I can bet on that for free. Why not?