FXTM information and reviews
FXTM
93%
OctaFX information and reviews
OctaFX
92%
XM information and reviews
XM
91%
FXCC information and reviews
FXCC
90%
Libertex information and reviews
Libertex
89%
FxPro information and reviews
FxPro
88%

All About Arbitrage


4 February 2021

What is Arbitrage? One of the most asked questions in the finance world. Continue to discover exactly what it is. To begin with, arbitrage is best defined as a trading strategy in which people seek to exploit price differences. Arbitrage takes place when there are temporarily unusual circumstances present.

Four different types of arbitrage will be examined throughout this article so we, as traders, can get an in-depth understanding of what it truly entails.

Location-Based Arbitrage


Location-based arbitrage is present when a seller’s ask price is lower than another buyer’s bid price, also known as a “negative spread”. An example of foreign exchange is when one bank quotes a particular price for a currency, while at the same time, a separate bank references a different price. In a situation such as this, an arbitrager would yield a profit by simultaneously buying the lower quote and selling the currency at the higher quote.

One key aspect to note is that arbitrageurs generally seek opportunities such as this in today’s swiftly moving market. These opportunities present themselves sometimes only for milliseconds or seconds at a time before the market reaches equilibrium again. Traders in the market participating in arbitrage help correct the market bringing it back to its level, equilibrium and fair state.

Triangular Arbitrage


Eluding in the title, triangular arbitrage involves three different currencies. The base, quote, and counter currency must coincide with each other to yield a positive implied cross rate for triangular arbitrage to be present. These pairs would be traded amounting to three (or more) trades in total to reach one arbitrageur’s final goal.

Just like location-based arbitrage, triangular arbitrage does not present itself in the market very often and only traders with highly sophisticated algorithms with the capabilities to move at lightning-fast speeds have a chance at this type of arbitrage. Furthermore, these pairs present throughout the tri-trade must match up in size and there are other hidden risks present to decrease the chance of this arbitrage to truly occur.

Interest Rate Arbitrage


Interest rate arbitrage, also called carry trade arbitrage, is when the transaction is completed with the sale being from a low-interest rate country and the buy currency from a high-interest rate country. For this arbitrage to be complete the arbitrager must reverse this process and subsequently would take the net difference of the interest paid on the two currencies at hand. This type of arbitrage is more lengthy than the previous ones discussed.

Spot-Future Arbitrage


Also known as cash-and-carry arbitrage, this arbitrage involves carrying out trades in both the spot and future markets with the same currencies. To carry out this arbitrage the trader would buy an undervalued asset and sell, or more commonly known as, shorts the same asset in the futures market. These transactions are done simultaneously. This can also be done in reverse where the seller would sell and then go long on the asset.

One might consider arbitrage trading “risk-free”, but on the contrary; risk will always be present. Arbitrage is not risk-free, but rather speculative in nature. One of the most common types of risks present during arbitrage trading is execution risk. Execution risk is when there is a price tick before the transaction has gone through, the depending factor on this could be milliseconds, or even something as elementary as your internet connection’s strength.

One of the debating questions that still stands is, do arbitrage opportunities still exist in today’s technologically advanced world? With information becoming more and more easily accessible and available, as well as the trading systems becoming more advanced in execution of timing and automated trading systems, opportunities for arbitrage have diminished significantly, but of course, will always be present.

This article was written and submitted by eXcentral. 

Disclaimer: This material is considered a marketing communication and does not contain, and should not be construed as containing investing advice or a recommendation, or an offer of or solicitation for any transactions in financial instruments or a guarantee or a prediction of future performance. Past performance is not a guarantee of or prediction of future performance.

Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.81% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

#source

Share:


Related

Trade Cryptocurrencies With MultibankFX
Trade Cryptocurrencies With MultibankFX

Explore and trade the most popular cryptocurrencies like Bitcoin, Ethereum, Ripple, etc. with MultiBank Group and take advantage of this volatile market...

13 May 2022

CryptoIFX: Broker you can rely on
CryptoIFX: Broker you can rely on

Here at CryptoIFX, we prioritize our clients’ interest and financial goals by providing excellent trading services. We offer absolute, goal-oriented, and professional investment guidance...

13 May 2022

April Results: NordFX TOP-3 Traders' Earnings Exceed 230,000 USD
April Results: NordFX TOP-3 Traders' Earnings Exceed 230,000 USD

NordFX Brokerage company has summed up the performance of its clients' trade transactions in April 2022. The services of social trading, PAMM and CopyTrading...

11 May 2022

RoboForex lowers margin requirements for trading Gold
RoboForex lowers margin requirements for trading Gold

Effective 8 May 2022, the margin requirements for positions in the XAUUSD pair will be reduced by two. If you already have open positions in this asset...

11 May 2022

FxPro expands opportunities for partners and opens rep office in Dubai
FxPro expands opportunities for partners and opens rep office in Dubai

FxPro is proud to announce that we are rapidly expanding our global presence by opening a new office set in the heart of UAE. Following our brand-new office in the Bahamas...

9 May 2022

IronFX: Best online trading platform for professionals
IronFX: Best online trading platform for professionals

Online forex trading for professionals is characterised by commitment and dedication as traders take this very seriously and consider it a full-time career....

5 May 2022


Editors' Picks

HFM information and reviews
HFM
87%
IronFX information and reviews
IronFX
86%
FXCM information and reviews
FXCM
85%
LegacyFX information and reviews
LegacyFX
83%
NordFX information and reviews
NordFX
82%
FP Markets information and reviews
FP Markets
81%

© 2006-2022 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.