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WOWEE Financial Services is rumored to be considering launching a takeover bid for WOAH International...

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Finance

WOWEE Financial Services is rumored to be considering launching a takeover bid for WOAH International Consulting Group. A local hedge fund (DPGM), believing that this will eventuate decides to employ a pairs merger arbitrage strategy to profit from their information.

b)DPGM decides they will have an equal investment in each firm (one short one long), and they will hedge their net beta using ASX200 Futures Contracts. WOWEE has a beta of 1.3, WOAH has a beta of 3.6. They intend to invest $10M in each. The ASX contracts have a beta of 1. What position should DPGM hold in each of the three securities (in dollar terms)?

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