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    Arbitrage

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    RishabYdv
    Arbitrage involves exploiting price differences between markets for the same asset. There are several forms of arbitrage in foreign exchange markets. Two-point arbitrage involves buying a currency at one price and selling it at a higher price elsewhere. Triangular arbitrage exploits pricing discrepancies across three currencies. Cross-exchange rates calculate exchange rates between non-dollar currency pairs using dollar or other dominant currencies as a bridge. Arbitrage opportunities are usually short-lived as traders act to eliminate any profitable price differentials.

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    Arbitrage

    Uploaded by

    RishabYdv
    235 views20 pages
    Arbitrage involves exploiting price differences between markets for the same asset. There are several forms of arbitrage in foreign exchange markets. Two-point arbitrage involves buying a currency at one price and selling it at a higher price elsewhere. Triangular arbitrage exploits pricing discrepancies across three currencies. Cross-exchange rates calculate exchange rates between non-dollar currency pairs using dollar or other dominant currencies as a bridge. Arbitrage opportunities are usually short-lived as traders act to eliminate any profitable price differentials.

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    types of arbitrage and forms

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    Arbitrage involves exploiting price differences between markets for the same asset. There are several forms of arbitrage in foreign exchange markets. Two-point arbitrage involves buying a currency at one price and selling it at a higher price elsewhere. Triangular arbitrage exploits pricing discrepancies across three currencies. Cross-exchange rates calculate exchange rates between non-dollar currency pairs using dollar or other dominant currencies as a bridge. Arbitrage opportunities are usually short-lived as traders act to eliminate any profitable price differentials.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    235 views20 pages

    Arbitrage

    Uploaded by

    RishabYdv
    Arbitrage involves exploiting price differences between markets for the same asset. There are several forms of arbitrage in foreign exchange markets. Two-point arbitrage involves buying a currency at one price and selling it at a higher price elsewhere. Triangular arbitrage exploits pricing discrepancies across three currencies. Cross-exchange rates calculate exchange rates between non-dollar currency pairs using dollar or other dominant currencies as a bridge. Arbitrage opportunities are usually short-lived as traders act to eliminate any profitable price differentials.

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    of 20

    ARBITRAGE

    What is Arbitrage?
    The simultaneous buying and selling of securities, currency, or
    commodities in different markets or in derivative forms in order to
    take advantage of differing prices for the same asset.
    Profiting from differences inpricesoryieldsin differentmarkets.

    Arbitrage in Spot Market


    A spot market is the market where immediate sale and purchase
    of forex takes place. The transactions are conducted for the spot
    delivery of currency.
    The key participants in spot market are banks of different country
    origins.
    The currencies are traded in form of bank deposits and transferred
    from sellers account to buyers account, with instructions in form
    of electronic messages.

    Forms of Arbitrage in Spot Market


    Inter-Bank Arbitrage
    Two-Point Arbitrage
    Triangular Arbitrage
    Cross Exchange Rates

    Inter-Bank Arbitrage
    Aformof simultaneouscasharrangementby abankfrom
    differentmarkets.
    Itborrowscash from theinterbank marketand thesamecash is
    then deposited locally at a higher interest rate.
    Thegoalis to ultimatelymakea risklessprofiton the extra cash
    earned from theinterest rates.

    Two-Point Arbitrage
    Buying a currency at one market & selling it at higher price in
    another market is known as Two-Point Arbitrage'.
    Consider the following spot quotations: Zurich Bank quotes:
    USD/CHF 1.4955/1.4962 & a Bank in New York quotes: CHF/USD
    0.6695/0.6699
    To acquire one million Swiss francs from Zurich Bank $(1,000,000 +
    1.4955)=$6,68,700 has to be invested.
    At New York Bank, $ (0.6695 X 1,000,000) = $6,69,500 has to be
    spent to acquire one million Swiss francs

    There is arbitrage if we buy one million Swiss francs against $ from


    the Zurich bank & sell them to New York bank i.e. $800.
    To prevent arbitrage, New York bank's (CHF/USD) quotes must
    overlap the (CHF/USD) quotes implied by the Zurich Bank (worked
    out to be 0.6686/0.6690).
    Foreign exchange markets very quickly eliminate two-point
    arbitrage.

    Triangular Arbitrage
    Triangular arbitrage(also referred to asthree-point arbitrage) is the
    act of exploiting anarbitrageopportunity resulting from a pricing
    discrepancy among three differentcurrenciesin theforeign exchange
    market.
    A triangular arbitrage strategy involves three trades, exchanging the
    initial currency for a second, the second currency for a third, and the
    third currency for the initial.
    A profitable trade is only possible if there exist market imperfections.
    Profitable triangular arbitrage is very rarely possible because when
    such opportunities arise, traders execute trades that take advantage
    of the imperfections and prices adjust up or down until the
    opportunity disappears

    Cross Exchange Rates


    A cross exchange rate is an exchange rate between a currency pair
    where neither currency is the US dollar.
    Under this method, exchange rate of third currency is calculated
    in respect of either one of the pair currencies those rate are
    known.
    In foreign exchange market, there are some selected currencies
    those dominated on other currencies for e.g. dollar, euro, franc
    and yen etc.
    This method is also called as Chain rule.

    Arbitrage in Forward Market


    Buying and selling forward, i.e., into the future.
    Transfer purchasing power across currencies and across time
    Market expectations
    As long as there is profitable arbitrage opportunity the market can
    not be in equilibrium.
    Market can be said to be equilibrium when no profitable arbitrage
    opportunity exist.

    Types of Arbitrage
    Location Arbitrage
    Depository receipt
    Telecom Arbitrage
    Economic Arbitrage

    Location Arbitrage
    Also known as Geographical arbitrage is the simplest form of
    arbitrage. In case of locational arbitrage, an arbs (arbitrageurs)
    looks for pricing discrepancies across geographically separate
    markets. For example, there may be a bond dealer in Russia
    offering a bond at 100-12/23 and a dealer in Washington is bidding
    100-15/23 for the same bond. For whatever reason, the two
    dealers have not spotted the aberration in the prices, but the arbs
    does. The arb immediately buys the bond from the Russian dealer
    and sells it to the Washington dealer.

    Telecom Arbitrage
    Telecom arbitrage companies allow phone users to make international
    calls for free or low rate through certain access numbers. Such services
    are offered in the some Countries; the telecommunication arbitrage
    companies get paid an interconnect charge by the UK mobile networks and
    then buy international routes at a lower cost. The calls are seen as free by
    the UK contract mobile phone customers since they are using up their
    allocated monthly minutes rather than paying for additional calls.

    Depository receipts
    A depositary receipt is a security that is offered in another foreign market. For
    instance a Chinese company wishing to raise more money may issue a depository
    receipt on the New York Stock Exchange, as the amount of capital on the local
    exchanges is limited. These securities, known as ADRs (American depositary
    receipt) or GDRs (global depository receipt) depending on where they are issued,
    are typically considered "foreign" and therefore trade at a lower value when first
    released. Many ADR's are exchangeable into the original security and actually
    have the same value. In this case there is a spread between the perceived value
    and real value, which can be extracted. Other ADR's that are not exchangeable
    often have much larger spreads. Since the ADR is trading at a value lower than
    what it is worth, one can purchase the ADR and expect to make money as its
    value converges on the original. However, there is a chance that the original
    stock will fall in value too, so by shorting it one can hedge that risk.

    Economic Arbitrage
    Economic arbitrage comes from differences in the costs of labour and
    capital, as well as variations in more industry-specific inputs such as
    knowledge or the availability of complementary products, technologies or
    infrastructures.
    The best type of economic arbitrage is the exploitation of cheap labour,
    which is common in labour-intensive industries like clothing. Capital cost
    differentials are slimmer but considering that most companies earn returns
    within two to three percentage points of their cost of capital, even such
    small differences are consequential. The subtlest form of arbitrage is
    exploitation of knowledge differential. The rush to establish R&D and
    software development centres in India is due to availability of relevant
    talent.

    Thank You

    Manju (3862)
    Mahima (3777)
    Kirti Singh (3747)
    Rishab Yadav (3985)
    Rishu Agarwalla (3865)

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