Arbitraje

What is arbitrage in the financial market?

Arbitrage is a lucrative tactic in financial markets, prevalent in large institutions thanks to advanced technologies. It capitalizes on opportunities where discrepancies in quotes in different markets generate profit margin. Despite the ideals of market equilibrium, these discrepancies are more common than you might think.

For a trade to be considered arbitrage, it must:

• Apply no risk to the arbitrageur.
• Not freeze capital during the transaction, i.e., buy and sell trades occur simultaneously.
• Have a very short window of opportunity, requiring immediate action.

How does arbitrage work in practice?

To illustrate arbitrage, let's imagine two markets: London and New York, with different exchange rates for the British pound. Suppose an arbitrageur observes:

• London: $1.30 per pound sterling.
• New York: $1.40 per pound sterling.

The arbitrageur can buy pounds in London and sell them in New York, taking advantage of the instant exchange rate disparity. If he has a million dollars, he could convert it into 769,230 pounds by buying in London. Then, by selling in New York, you would receive $1,076,923, generating $76,923 in risk-free profit.

How to identify arbitrage opportunities in the foreign exchange market?

The detection of arbitrage opportunities requires:

• Access to market information from various regions or platforms.
• Advanced technologies that detect and execute transactions in milliseconds.

Let's take another example for analysis between Mexico City and New York:

• Mexico: 19.96 pesos to the dollar.
• New York: 19.90 pesos to the dollar.

With 10,000 pesos, the strategy would be to sell dollars purchased in New York at a higher rate in Mexico, thus maximizing profit without risk.

Curious example of currency arbitrage

In 2017, the physical similarity between the Thai Baht currency and the 2-euro currency led Thai tourists to use Bahts as euros in vending machines in Europe. This dissonance caused losses for European businesses, while Thai tourists took advantage of a kind of "physical arbitrage". This anecdote demonstrates how arbitrage can manifest itself beyond the digital and financial realm.

Have more questions about the financial world? Keep learning and look for opportunities to diversify your knowledge and strategies.