Trading Contingent Value Rights

A contingent value right, or CVR, is a security handed out alongside cash or stock in a merger, spin-off, or restructuring, and it is a promise rather than a fixed payment: it pays a specified amount only if some future milestone is met — a drug gets FDA approval, an asset sells above a threshold price, a lawsuit settles favorably — and expires worthless otherwise. Companies issue CVRs to bridge a valuation gap when buyer and seller disagree about the odds of that milestone: instead of arguing over price today, the seller gets extra upside later if the uncertain event resolves in their favor.

Once issued, CVRs often trade separately, usually on a much thinner and less liquid market than the underlying stock. Their price is effectively a probability estimate: if a CVR pays $1.00 on approval and nothing otherwise, and it trades at $0.30, the market is pricing roughly a 30% chance of approval, discounted a bit for the time value of waiting and for how hard the right is to sell. A specialist merger-arbitrage desk will size a CVR position much smaller than the underlying deal spread, precisely because the payoff is binary and the true probability is far harder to pin down than an ordinary deal's closing risk.