How to Calculate Arbitrage


Profit-oriented exploitation of existing price, rate and / or interest rate differences of a good (goods) or security that is traded on different exchanges (stock exchange) or markets (market) at the same time. All goods traded on the market, in particular financial stocks and foreign exchange, are suitable. The arbitrageur tries to make a profit by simultaneously buying and selling a homogeneous good cheaply and at the same time ensures that uniform prices arise on the various sub-markets.

The targeted exploitation of price, rate and interest rate differences of fungible goods, such as stocks, foreign exchange or precious metals, which are given at different stock exchanges at a certain point in time, is called arbitrage.

The conclusion of an arbitrage trade can be based on the desire to achieve (additional) profits through discernible exchange rate differences by concluding opposite contracts. Business entities can, however, also use arbitrage transactions as an instrument to avoid losses. In this case, the arbitrageur takes a suitable counter-position to secure an already existing obligation. The ideas of arbitrage can also be found in investment and finance theory. Modigliani / Miller, for example, considered the possibility of arbitrage deals as part of their proof of the irrelevance of debt for the market value of a company (irrelevance thesis).

In addition, it should be noted that the information efficiency available on the stock exchanges influences the possibilities for arbitrage transactions. Since modern electronic information and communication systems have increased market transparency, arbitrage transactions on stock exchanges are only possible to a limited extent.

The objective of arbitrage is either to make a profit (differential arbitrage) or to avoid losses (equalization arbitrage). In differential arbitrage, the arbitrageur takes advantage of the different price differences by entering into two (or more) opposite contracts. The profit then results from the exchange rate difference.

In equalization arbitrage, the arbitrageur takes the most favorable counter-position (sell or buy) to hedge an obligation (buy or sell). Differential and equalization arbitrage are subsumed under the term spatial arbitrage. If there are value date differences between the various markets (exceptional situation due to e.g. public holidays), time arbitrage may be possible.

Arbitrage is only possible on the basis of a good information system. As a rule, it is risk-free for the arbitrageur. Due to the modern electronic information and communication systems and the resulting market transparency, arbitrage is only profitable to a limited extent because the margins are too low. In arbitrage, like interest rate and currency swaps, the focus is increasingly on exploiting different credit ratings or market access requirements. In addition, the arbitrage between different trading objects, such as B. between money market claims and financial futures, gained in importance.

Achieving risk-free profits, so-called "free lunches", by taking advantage of price differences in different markets at the same time. In perfect capital markets, with information efficiency in equilibrium, there can be no arbitrage opportunities, since the informed market participants will immediately take advantage of every profitable arbitrage opportunity for the immediate restoration of equilibrium in the markets. In practice, arbitrage opportunities exist, but the opportunities for arbitrage are limited due to the transaction costs associated with carrying out the arbitrage processes. Risk-free arbitrage profits are primarily generated by institutional investors with correspondingly large trading volumes.

Arbitrage is the term used to describe transactions that exploit price, rate or interest rate differences on different markets for the purpose of making a profit. They are usually processed on the stock exchange. A distinction is made between differential and equalization arbitrage.

Transactions that take advantage of the differences between the prices or rates for a good (foreign exchange, securities, loans, raw materials) that are valid on locally separated markets. A distinction is made between differential arbitrage (arbitrage in the narrower sense) and equalization arbitrage. In differential arbitrage, the purchase of the good on the market with the lower rate (price) and the simultaneous sale on the market with the higher rate (price) are coupled (e.g. purchase of Pf and on the Frankfurt foreign exchange at the rate of 4 .34 EUR / Pf and, sold on the London Foreign Exchange at the rate of 4.36 EUR / Pf and). A profit results from the exchange rate difference. In equalization arbitrage, the purchase or sale of a good is carried out on the market at the most favorable exchange rate (price). (Examples: The investment of liquid funds abroad, if there are more favorable investment conditions than in Germany Prices of a good, since demand is directed to the market with the lower price (tendency towards price / price increase) and (in the case of differential arbitrage) the supply on the market with the higher price increases (tendency towards price / price increase) Price reduction).

Exploitation of price and price differences on temporally and spatially separate sub-markets for the purpose of making a profit. In this way, price differences tend to be evened out.

Transactions to take advantage of simultaneously existing price differences on different spatially (for cash markets) or temporally (for futures markets) separate sub-markets. Arbitrage is risk-free due to the almost simultaneous conclusion of buy and sell transactions. Arbitrage deals bring about an adjustment of simultaneously existing price differences by changing supply or demand. Arbitrage takes place in competitive markets as long as the price differences are greater than the transaction costs associated with the arbitrage. Interest rate arbitrage and currency arbitrage (swap policy) are special forms. ARGE Abbreviation for working group (industrial consortium).

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