arbitrage

(noun)

Any market activity in which a commodity is bought and then sold quickly, for a profit which substantially exceeds the transaction cost

Related Terms

Examples of arbitrage in the following topics:

  • Arbitrage Pricing Theory

    • The Arbitrage Pricing Theory (APT) is a linear relationship between systemic factors and the return of an asset.
    • Arbitrage Pricing Theory (APT) is a model for asset pricing that was proposed by Stephen Ross in 1976.
    • If an asset is either over- or under-priced, then there is an arbitrage opportunity.

  • Overview of Convertible Securities

    • Convertible arbitrage is a market-neutral investment strategy often employed by hedge funds.
    • Arbitrage is the simultaneous purchase and sale of an asset in order to profit from a difference in the price.
    • This diagram illustrates an arbitrage opportunity in foreign currency exchange.

  • Chapter Questions

    • Please calculate the cross rate to determine if arbitrage exists.
    • If intermarket arbitrage exists, how much profit could the Citibank trader earn?

  • Foreign Exchange Rates

    • Moreover, investors can profit from arbitrage, when currency exchange rates differ between two or more markets.
    • Furthermore, investors could use arbitrage.
    • Currency exchange rates are continually fluctuating, and a banker or investor can profit from price differences, called intermarket arbitrage.
    • Since the exchange rates differ, then arbitrage exists, and we can profit from the exchange rate differences.
    • In the modern age, the international banks use computers to spot differences in exchange rates and quickly execute transactions to profit from arbitrage.

  • Interest Rate Parity Theorem

    • International investors use arbitrage to price a forward contract.
    • Consequently, the investors use arbitrage to invest in United States and Malaysia until the rates of return for both countries converge to the same rate.
    • However, this analysis assumes arbitrage brings the two investments into equality.
    • Thus, arbitrage ensures we set the source of funds from the foreign country equal to the use of the funds for the domestic country, yielding Equation 35.
    • Arbitrage adjustment process can be slow, and rates of returns can differ between countries.

  • International Fisher Effect

    • Consequently, arbitrage drives the rate of returns together.
    • Then we set Equations 17 and 18 equal to each other because international arbitrage causes both investment returns to converge to the same rate, shown in Equation 19.
    • Once investors have exhausted their arbitrage opportunities, they stop moving their capital to the foreign country.

  • Fama-French Three-Factor Model

    • Like CAPM and the Arbitrage Pricing Theory, the Fama-French three-factor model is a linear model that relates structural factors to the expected return of an asset.

  • Purchasing Power Parity (PPP) Theory

    • If a price difference exists between two markets, then arbitrage is possible.
    • Eventually, arbitrage stops, when the prices converge between both countries.
    • If the spot exchange rate is 1.4 francs per $1, subsequently, traders use arbitrage.

  • Implications for Variance

  • Answers to Chapter 16 Questions

    • Consequently, arbitrage is possible.