AMITY GLOBAL

BUSINESS SCHOOL Noida

MBA
Arbitrage
Mr. Sachin Rohatgi

1
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BUSINESS SCHOOL Noida

The Spot Market

Arbitrage
The act of buying currency in one market at lower
prices and selling it in another at higher price.
It helps the arbitrageurs in the market to earn profit
without risk
It is a balancing operations that do not allow the same
currency to have varying rates in different forex
markets.
People who engage in arbitrage are
called arbitrageurs, such as a bank or brokerage firm.
AMITY GLOBAL
BUSINESS SCHOOL Noida

Conditions of Arbitrage

Arbitrage is possible when one of three conditions is

met:
The same asset does not trade at the same price on all
markets ("the law of one price").
Two assets with identical cash flows do not trade at
the same price.
An asset with a known price in the future does not
today trade at its future price discounted at the risk-
free interest rate
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BUSINESS SCHOOL Noida

Types of arbitrage
Geographical
Triangular arbitrage
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BUSINESS SCHOOL Noida

The Spot Market

Geographical Arbitrage

Different prices quoted in two geographical markets for the

same currency
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BUSINESS SCHOOL Noida
Exercise 1
Tokyo and London
Observe the following:
USD/INR
London 62.5730--62.61
Tokyo 62.6750 -- 62.6675
Can make money out of it if you have Rs.100 million with you ?
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BUSINESS SCHOOL Noida
Triangular Arbitrage

The process of converting one currency to another,

converting it again to a third currency and, finally,
converting it back to the original currency within a
short time span.
This opportunity for riskless profit arises when the
currency's exchange rates do not exactly match up.
Triangular arbitrage opportunities do not happen very
often and when they do, they only last for a matter of
seconds.
AMITY GLOBAL
BUSINESS SCHOOL Noida
Exercise-2

The following are three quotes in three forex markets

1$=Rs.60.54 in Mumbai
1pound=Rs.100.42 in London
1Pound=$1.66 in Newyork
Are there any arbitrage gains possible? Assume there are no
transaction costs and the arbitrageur has $1,000,000.
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BUSINESS SCHOOL Exercise 3 Noida

A New York bank is currently offering these spot rates:

USD/JPY: 110.25/111.10
USD/AUD : 1.6520/1.6530

At the same time a bank in Sydney is quoting:

AUD/JPY: 68.30/69.00

Is there an arbitrage opportunity?

AMITY GLOBAL
BUSINESS SCHOOL Noida
Arbitrage Condition

1/ (USD/JPY)ask(N) X (USD/AUD)bid (N) X

(AUD/JPY)bid (S) >1

In case of non reverse Arbitrage

(USD/JPY) bid (N) X 1/ (USD/AUD) ask (N) X

1/(AUD/JPY)ask (S) 1