Paper: arXiv 2604.21581

Authors: Emilio Barucci, Yuheng Lan, Daniele Marazzina

Abstract

We investigate the optimal execution of contracts that are used in merger&acquisition deals. We consider cash-settled and physically delivered contracts between a broker and a counterpart. Contracts are linear (total returns swaps), nonlinear (collar contracts) or Asian type (TWAP based contracts). We derive the optimal execution strategy and the optimal fee through indifference utility arguments allowing for linear market effects of trades. We show that linear cash-settled contracts are more expensive and more exposed to manipulation/statistical arbitrages by the broker. Also nonlinear and Asian type contracts are exposed to these phenomena.

Complexity vs Empirical Score

  • Math Complexity: 7.5/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper relies on utility indifference pricing and stochastic control frameworks, involving intensive derivations of optimal execution strategies under price impact. While it provides numerical analysis and simulation in Section 4, the primary contribution is theoretical and analytical rather than based on exhaustive empirical testing of live market data.

Research Flowchart

  flowchart TD
    A[Research Goal: Optimal pricing/hedging of M&A contracts] --> B[Inputs: Linear, Nonlinear, Asian-type contracts]
    B --> C[Methodology: Utility indifference & linear market impact]
    C --> D[Computation: Solve optimal execution & fee strategies]
    D --> E[Outcome: Contract pricing & exposure analysis]
    E --> F[Findings: Linear contracts are more costly & prone to manipulation/arbitrage]

Cited References (40)

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  5. Price mediated contagion through capital ratio requirements with VWAP liquidation prices (2021) — link
  6. A repo model of fire sales with VWAP and LOB pricing mechanisms (2020) — link
  7. Utility‐based pricing and hedging of contingent claims in Almgren‐Chriss model with temporary price impact (2019) — link
  8. Hedging with physical or cash settlement under transient multiplicative price impact (2018) — link
and 32 more
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  2. Hedging of Covered Options with Linear Market Impact and Gamma Constraint (2015) — link
  3. Hedging with temporary price impact (2015) — link
  4. Almost-sure hedging with permanent price impact (2015) — link
  5. TUG‐OF‐WAR, MARKET MANIPULATION, AND OPTION PRICING (2014) — link
  6. Accelerated Share Repurchase: pricing and execution strategy (2013) — link
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0 of 40 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.