Vous êtes sur la page 1sur 15

ARBITRAGE

The Forex Market

Presented By Gaurav, Harshad, Hemant, Jayashree, Kamalakannan

Todays Objective
To know What is Arbitrage?

To Define Arbitrage
To Know the Features of Arbitrage

To Know the Types of Arbitrage


To describe Arbitrage Between Banks & Two Point Arbitrage in the Forex Market.

Examples & Opportunities


Conclusion

What is Arbitrage
An arbitrage is risk-free in common use, for eg. If we get an opportunity to buy an asset for 5$ from one place and turn around to sell it for 20$ in another place and make 15$ for the effort taken which we can call us arbitrage. The 15$ gain would be my arbitrage profit.

Define Arbitrage
An Arbitrage operation can be defined to be the attempt to realize a profit by taking advantage of different prices of currencies in the market. Repeated operations of this kind will cause the differences in the rate to disappear.

Conditions For Arbitrage


The same asset does not trade at the same price on all markets. Two assets with identical cash flows do not trade at the same price. An asset with a known price in the future does not trade today at its future price discounted at the risk-free interest rate

Arbitrage & Its Types


ARBITRAGE BETWEEN BANKS

TWO POINT ARBITRAGE

CROSS RATE & TRIANGULAR ARBITRAGE

Arbitrage Between Banks


Though one hears the term market rate, it is not true that all banks will have identical quotes for a given pair of currencies at a given point of time. The rates will be close to each other but it may be possible for a corporate customer to save some money by shopping around.

Arbitrage Between Banks


Bank A / $ : 1.4550 / 1.4560 B A Bank B / $ : 1.4538 / 1.4548

1.4550

1.4560

A Bank A

1.4538

1.4548

Bank B

Sum Up: Here 1 Pound can be Bought / Sold @ the highlighted $ price in Bank A & Bank B The above situation gives rise to an Arbitrage opportunity, by buying pounds from Bank B @ USD 1.4548 and Sold to Bank A @ USD 1.4550 for a net profit of USD 0.0002 With the latest technology these arbitrage opportunities will be quickly exploited. To seal this opportunity the Bank B should raise the Ask rate and / or Bank A have to lower its Bid rate

Arbitrage Between Banks


Bank A / $ : 1.4550 / 1.4560 B A Bank B / $ : 1.4545 / 1.4555

1.4550

1.4560

A Bank A

1.4545

1.4555

Bank B

Sum Up: Here there is no Arbitrage Opportunity as seen in our previous option. To create an opportunity we should have the ask rate in one quote should be as high as bid rate in the other. Now the Bank A will be hit often on the bid side than Bank B

Two Point Arbitrage


The arbitrage transaction that involve buying a currency in one market and selling it at a higher price in another market is called Two point Arbitrage. Foreign exchange markets quickly eliminate two point arbitrage opportunities if and when they arise.

Calculation - Steps

Determine the Arbitrage Opportunity.

Get the exchange rate for each Pair.

Calculate the Arbitrage.

Two Point Arbitrage Case 1


Consider the following spot quotations
A B Sydney Bank quotes: USD/AUD 1.8885/1.8890 1USD = AUD 1.8885 SYDNEY BANK => USD 10000*1.8885 => AUD 18885/1.8957 A B Bank in New York quotes: AUD/USD 0.5275/0.5280 AUD 1 = $ 1/0.5275 =1.8957 NEW YORK BANK

Sum Up: AUD is bought for 10k USD value from Sydney Bank and sold to New York bank for the bid rate of AUD 0.5275, that implies 18885/1.8957 Arbitrage Loss : USD 38

Two Point Arbitrage Case 2


Consider the following spot quotations
A B Sydney Bank quotes: USD/AUD 1.8885/1.8890 1AUD = USD 1.8890 SYDNEY BANK => AUD 10000/1.8890 => USD 5293*1.8939 A B Bank in New York quotes: AUD/USD 0.5275/0.5280 USD 1 = AUD 1/0.5280=1.8939 NEW YORK BANK

Sum Up: USD is bought for 10k AUD value from Sydney Bank and sold to New York bank for the ask rate of USD 0.5280, that implies 5293*1.8939 Arbitrage Profit: AUD 24

Two Point Arbitrage Case 3


Consider the following spot quotations
A B Bank in New York quotes: AUD/USD 0.5275/0.5280 1AUD = USD 1 / 1.8890 => 0.5293 1 USD = AUD 0.5280 SYDNEY BANK => USD 10000/0.5280 => AUD18939*0.5293 NEW YORK BANK A B Sydney Bank quotes: USD/AUD 1.8885/1.8890

Sum Up: AUD is bought for 10k USD value from NEW York Bank and sold to Sydney bank for the ask rate of USD 0.5293, that implies 18939*0.5293 Arbitrage Profit : USD 24

Two Point Arbitrage Case 4


Consider the following spot quotations
A B Sydney Bank quotes: USD/AUD 1.8885/1.8890 1AUD = USD 1.8885 SYDNEY BANK => AUD 10000/1.8957 => USD 5275*1.8885 A B Bank in New York quotes: AUD/USD 0.5275/0.5280 1 USD = AUD 1/0.5280=1.8957 NEW YORK BANK

Sum Up: AUD is bought for 10k New York Bank and sold to Sydney bank for the bid rate of USD 1.8885, that implies 5275*1.8885 Arbitrage Loss: AUD 38

Conclusion
Arbitrage is a fascinating process. The execution of an arbitrage trade today is fairly simple through technology. However, as derivatives get more complicated, the procedures employed for doing arbitrage will steadily get more complex. We have to rely on Computers and the speed and efficiency of the operator

Vous aimerez peut-être aussi