He can only be found in the streets of the town where the quest takes place where you will be automatically sent after you accept the quest.
The merchant is poorly geared for combat and can be murdered quite easily. If you only injure him without killing him too quickly, he will plead for mercy. You can let him go with a threat, or kill him anyway. Following through with the execution will grant a better relation bonus with the lord who gave you the quest.
Note: Troops have a set of default stats; at the beginning of a new game, these stats are randomly adjusted for each type of troop. The following is the default set for this troop as seen within the game code and may not reflect the specific stats you will see during actual gameplay. For more information, see Troop stats.