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What is Arbitrage?
The simultaneous buying and selling of securities, currency, or
commodities in different markets or in derivative forms in order to
take advantage of differing prices for the same asset.
Profiting from differences inpricesoryieldsin differentmarkets.
Inter-Bank Arbitrage
Aformof simultaneouscasharrangementby abankfrom
differentmarkets.
Itborrowscash from theinterbank marketand thesamecash is
then deposited locally at a higher interest rate.
Thegoalis to ultimatelymakea risklessprofiton the extra cash
earned from theinterest rates.
Two-Point Arbitrage
Buying a currency at one market & selling it at higher price in
another market is known as Two-Point Arbitrage'.
Consider the following spot quotations: Zurich Bank quotes:
USD/CHF 1.4955/1.4962 & a Bank in New York quotes: CHF/USD
0.6695/0.6699
To acquire one million Swiss francs from Zurich Bank $(1,000,000 +
1.4955)=$6,68,700 has to be invested.
At New York Bank, $ (0.6695 X 1,000,000) = $6,69,500 has to be
spent to acquire one million Swiss francs
Triangular Arbitrage
Triangular arbitrage(also referred to asthree-point arbitrage) is the
act of exploiting anarbitrageopportunity resulting from a pricing
discrepancy among three differentcurrenciesin theforeign exchange
market.
A triangular arbitrage strategy involves three trades, exchanging the
initial currency for a second, the second currency for a third, and the
third currency for the initial.
A profitable trade is only possible if there exist market imperfections.
Profitable triangular arbitrage is very rarely possible because when
such opportunities arise, traders execute trades that take advantage
of the imperfections and prices adjust up or down until the
opportunity disappears
Types of Arbitrage
Location Arbitrage
Arbitrage without the Cost of Transaction
Telecom Arbitrage
Telecom Arbitrage
Telecom arbitrage companies allow phone users to make international calls for
free through certain access numbers. Such services are offered in the United
Kingdom; the telecommunication arbitrage companies get paid an
interconnect charge by the UK mobile networks and then buy international
routes at a lower cost. The calls are seen as free by the UK contract mobile
phone customers since they are using up their allocated monthly minutes
rather than paying for additional calls.
Such services were previously offered in the United States by companies such
as FuturePhone.com.These services would operate in rural telephone
exchanges, primarily in small towns in the state of Iowa. In these areas, the
local telephone carriers are allowed to charge a high "termination fee" to the
caller's carrier in order to fund the cost of providing service to the small and
sparsely populated areas that they serve. However, FuturePhone (as well as
other similar services) ceased operations upon legal challenges from AT&T and
other service providers