Editing Arbitrage (section)

===Dual-listed companies===
A [[dual-listed company]] (DLC) structure involves two companies incorporated in different countries contractually agreeing to operate their businesses as if they were a single enterprise, while retaining their separate legal identity and existing stock exchange listings. In integrated and efficient financial markets, stock prices of the twin pair should move in lockstep. In practice, DLC share prices exhibit large deviations from theoretical parity. Arbitrage positions in DLCs can be set up by obtaining a long position in the relatively underpriced part of the DLC and a short position in the relatively overpriced part. Such arbitrage strategies start paying off as soon as the relative prices of the two DLC stocks converge toward theoretical parity. However, since there is no identifiable date at which DLC prices will converge, arbitrage positions sometimes have to be kept open for considerable periods of time. In the meantime, the price gap might widen. In these situations, arbitrageurs may receive [[Margin calls|margin call]]s, after which they would most likely be forced to liquidate part of the position at a highly unfavorable moment and suffer a loss. Arbitrage in DLCs may be profitable, but is also very risky.<ref>{{cite journal|last1=de Jong|first1=A.|first2=L.|last2=Rosenthal|first3=M.A.|last3=van Dijk|date=June 2008|title=The Risk and Return of Arbitrage in Dual-Listed Companies|ssrn=525282}}</ref><ref>{{cite web|url=http://mathijsavandijk.com/dual-listed-companies/ |author=Mathijs A. van Dijk |title=Dual-listed Companies |access-date=January 30, 2013}}</ref>

A good illustration of the risk of DLC arbitrage is the position in [[Royal Dutch Shell]]—which had a DLC structure until 2005—by the hedge fund [[Long-Term Capital Management]] (LTCM, see also the discussion below). Lowenstein (2000) <ref>{{cite book|last1=Lowenstein|first1=R.|year=2000|title=When genius failed: The rise and fall of Long-Term Capital Management|url=https://archive.org/details/whengeniusfailed00lowe|url-access=registration|publisher=Random House|isbn=9780375503177}}</ref> describes that LTCM established an arbitrage position in Royal Dutch Shell in the summer of 1997, when Royal Dutch traded at an 8 to 10 percent premium. In total, $2.3 billion was invested, half of which was long in Shell and the other half was short in Royal Dutch (Lowenstein, p.&nbsp;99). In the autumn of 1998, large defaults on Russian debt created significant losses for the hedge fund and LTCM had to unwind several positions. Lowenstein reports that the premium of Royal Dutch had increased to about 22 percent and LTCM had to close the position and incur a loss. According to Lowenstein (p.&nbsp;234), LTCM lost $286 million in equity [[pairs trading]] and more than half of this loss is accounted for by the [[Royal Dutch Shell]] trade. (See further under [[Limits to arbitrage]].)