The number of acquirer shares a target shareholder receives for each target share in a stock-based merger.
The ratio can be fixed, floating, or collared. Fixed ratios give certainty about ownership but not about value. Floating ratios fix the value by adjusting the share count near closing. Collars fix the value inside a band and let it float outside the band.
The ratio is also the arbitrage hedge ratio: a trader long 1,000 target shares shorts the ratio multiplied by 1,000 acquirer shares to isolate the spread.
Example: a 0.45 exchange ratio means 1,000 target shares become 450 acquirer shares. To hedge, the arbitrageur shorts 450 acquirer shares, leaving exposure only to the deal closing rather than to the acquirer's price.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.
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