Arbitrage definition
Arbitrage is a trading activity in which an arbitrageur makes a sure
profit without committing an initial investment or without committing
any of the arbitrageur's own money.
Finance "free lunch" situation
in finance, there is free lunch in the form of arbitrage, it do...
✓ 1. Locational Arbitrage: Taking advantage of a mismatch in bid/ask
between two banks
✓
✓ 2.Inter-Market (or triangular or cross-currency) arbitrage: Taking
advantage of mismatches in currency quotes in 3 markets or 3
currencies by calculating cross currency rates.
✓
✓ ^these two are instant, next one is not
✓
✓ 3.Covered Interest Arbitrage (CIA): An arbitrageur takes advantage of
mismatches between interest rates in two countries, the spot rate of
their respective currencies and the forward rate of those currencies.
How does a speculator determine whether to buy or sell a foreign currency in
the forward or futures markets?
✓ They act on their expectations about the direction of movement in
currency rates to make profits (take risks)
How does a hedger determine whether to buy or sell a foreign currency in the
forward or futures markets?
Master01 | October, 2024/2025 | Latest update
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