Need Help With Your Paper? TutorChrome experienced experts and professionals provide Arbitrage Assignment Help

 

Arbitrage :

 

In financial and economic terms, Arbitrage means the concurrent purchase and sale of the same commodities, shares, securities or foreign exchange in different markets to earn the profit from the price difference. It is a trade in which the profits is being made by manipulating the price differences of same financial instruments, in different forms or on different markets. Arbitrage is simply the trading of the financial instruments when the opportunity exists during the trading day to take advantage of differences in the value of the markets where the trade takes place. The trader who practices the arbitrage is known as Arbitrageurs such as banks or brokerage firms. For example, say XYZ stock is bought in New York stock market for $12 and is sold in other market say London at $ 12.75, an arbitrageur may purchase the XYZ stock in New York market and sell it at London, by making a profit of $ 0.75 per share.

 

In Academic use, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state. In simple words, an arbitrage is a risk- free profit at zero cost.

Arbitrage Conditions

Arbitrage is possible only when any of the three conditions is fulfilled:

  1. The law of one price: In this condition, the same financial instrument is not traded at the same price on all the markets.
  2. Two financial instruments with the identical cash flows can not be traded at the same price.
  3. No financial instruments can be traded with its future price discounted at a risk-free interest rate.

 

There are different types of arbitrage available in the financial market:

  • Municipal bond arbitrage:
  • Merger arbitrage/Risk arbitrage
  • Depository receipts:
  • Convertible bond arbitrage:
  • Statistical arbitrage
  • Covered interest arbitrage
  • Uncovered interest arbitrage
  • Regulatory arbitrage
  • Triangle arbitrage
  • Telecom arbitrage
  • Political arbitrage
  • Fixed income arbitrage
  • Volatility arbitrage

 

Say for example:

An investor-owned 500 shares of ABC Company. One day he notices that ABC is trading at 155 on the BSE and 150 on the NSE. Then he can sell his shares on BSE at 155 on the BSE and can buy back them on NSE at 150.

So profit, in this case, would be 500*5.00 = 2500.00 less the brokerage.

Arbitrage is allowed and performed legally. It is responsible for a large part of trading for the investors on daily volumes in the market