Types of Arbitrage

7/30/2019 Types of Arbitrage

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Types of Arbitrage

1.Merger arbitrage:Merger arbitrage is also known as risk arbitrage. In this type ofarbitrage, the stock of a particular company, which is going tobe taken over is purchased and at the same time, the stock ofthe company, which is going to take over the former companyare short sold.

2. Depository receipts:A depository receipt is that form of a security, which isprovided in the form of a tracking stock on a financial market

located in another country. Here the profit arises from thespread between the real value and the perceived value.

3. Convertible bond arbitrage:A convertible bond is that type of a bond, which can beconverted into a specified number of shares of a company.Convertible bond prices are dependent on three principalelements; the credit spread, the stock price, and the interest

rate. The profit of convertible bond arbitrage arises from thefunctions of these elements.

4. Statistical arbitrage:In this kind of arbitrage, the arbitrageurs take the advantage ofthe differences in anticipated values.

5. Covered interest arbitrage:

In this kind of arbitrage, a financial instrument or security isbought by an investor in the denomination of a foreignexchange or foreign currency, and the foreign exchange risk ishedged through the sale of a forward contract in the salesproceeds of the financial instrument again in the homecurrency.


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6. Uncovered interest arbitrage:In case of uncovered interest arbitrage, funds or monies aresent to another country for availing the benefit of increasedinterest rates in forex agencies.

7. Regulatory arbitrage:In this type of arbitrage, a regulated organization avails thebenefit of the deviation between the regulatory positioning andthe economic or real risk.

8. Triangle arbitrage:It is also known as triangular arbitrage and in this approach,

the benefit is taken out from a condition of disequilibrium lyingbetween three forex markets.

9. Telecom arbitrage:This type of arbitrage strategy is utilized by Telecom arbitrageorganizations, such as Action Telecom UK.

10. Political arbitrage:In this approach, political knowledge or calculations about thefuture are implemented for discounting and forecasting valuesof securities.

11. Fixed income arbitrage:This kind of arbitrage is primarily related to hedge funds.

12. Volatility arbitrage:It is also known as vol arb and is a form ofstatisticalarbitrage. It is used with the help of buying or selling of adelta neutral option portfolio and the underlier of the portfolio.


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What is Arbitrage Software ?

In an arbitrage, an investor makes a series of transactions to take advantage of pricingdifferences in the market and earn risk-free profits.A large number of investors look forarbitrage opportunities and conduct arbitrages, so the

pricing differences usually last only for a very short time.An investor needs to spot pricing differences and make the transactions

quickly to conduct a successful arbitrage.

Arbitrage software automates the process of detecting price differences, allowing theinvestor to quickly take advantage of the discrepancies.

An arbitrage opportunity exists when there are two assets with identicalcash flows

but different market prices.

An investor can then buy the cheaper asset and sell it at the more expensive price.As investors take advantage of the price differences, the price of the cheaper asset increasesand the price of the more expensive asset decreases so that the prices eventually convergeand no more arbitrage opportunity exists.

Many investors actively look for arbitrage opportunities because they are risk-free, so thispricing correction takes little time.An investor has to spot the price difference quickly and make the transactionssimultaneously to conduct an arbitrage.Arbitrage software often shows the combination of assets for arbitrage within seconds ofthe price differences arising.With the large number of investors using arbitrage software, this capability results inarbitrage opportunities only persisting for a few seconds at a time.The market prices of the assets correct themselves and the price differences disappear.An arbitrage often involves a very small difference in price, so that commission fees couldabsorb all the profits and erase the benefits of arbitrage.

Arbitrage software often has smaller commissions because the investor conducts much ofthe trading himself.

Using such software therefore increases the percentage of profits from arbitrages.

Arbitrage software can work with various types of assets, including stocks, derivatives suchas options, andfutures and foreign currencies.It often uses sounds and visual alerts to let an investor know when there is an arbitrageopportunity.If the assets involved trade in different currencies, the arbitrage software can often convertthem into one currency for easier analysis.Some suppliers offersports arbitrage software, but unlike arbitrages with other assets,sports arbitrage often constitutes gambling.

It involves taking the best odds available on sporting events so that, regardless of theoutcome, the investor earns a profit.Many such schemes never generate the promised high returns and some such companiessimply disappear after collecting various fees.
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What is Arbitrage ?

Arbitrage is the activity of exploiting imbalances between two or more markets. Foreign moneyexchangers operate their entire businesses on this principle. They find tourists who need theconvenience of a quick cash exchange. Tourists exchange cash for less than themarket rate and

then the money exchanger converts those foreign funds into the local currency at a higher rate.The difference between the two rates is the spread or profit.There are plenty of other instances where one can engage in the practice arbitrage. In somecases, one market does not know about or have access to the other market. Alternatively,arbitrageurs can take advantage of varying liquidities between markets.The term 'arbitrage' is usually reserved for money and other investments as opposed toimbalances in the price of goods. The presence of arbitrageurs typically causes the prices indifferent markets to converge: the prices in the more expensive market will tend to decline andthe opposite will ensue for the cheaper market. The the efficiency of the market refers to thespeed at which the disparate prices converge.Engaging in arbitrage can be lucrative, but it does not come without risk. Perhaps the biggest risk

is the potential for rapid fluctuations in market prices. For example, the spread between twomarkets can fluctuate during the time required for the transactions themselves. In cases whereprices fluctuate rapidly, would-be arbitrageurs can actually lose money.
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What Are the Most Common Arbitrage Strategies ?

Using arbitrage strategies correctly can help an investor realize a profit with very littlerisk.Arbitrage is essentially taking advantage of misquotes or discrepancies in price to make a

profit.An individual could get involved in basic arbitrage, stock arbitrage, index fund arbitrage,and even sports bettingarbitrage.

The most basic of arbitrage strategies involves selling a product.

For example, if a product is selling for $20 US Dollars (USD) in one market and sells for$15 USD in another, an individual could purchase it in the cheaper market and sell it inthe more expensive one.This provides a scenario in which there is no risk and guaranteed orders for the investor.The investor can make a profit of $5 USD per transaction.Another one of the popular arbitrage strategies is stock arbitrage.

This strategy is going to involve utilizing different stock markets.

For example, if the price of a stock on one market is $10 USD and $9.97 USD onanother, the investor could make a profit of $.03 USD for each share of stock that he orshe sells between the two.While this may seem like a small potential profit, when large volumes ofsharesareinvolved, the numbers can add up quickly.

Index funds have also been known to get involved with arbitrage strategies.

Index funds are based on a particular financial index.The fund invests only in the stocks that are presented in the financial index.When a company is removed from the index, another company is put in its place.If an index fund company can accurately predict which companies are going to beincluded in the fund, it can purchase the shares of the companies in advance.

When all of the other index funds hear about the companies being included in the index,they will have to purchase shares of the companies as well.When this happens, the price of the stock is going to increase because of all the buying.Investors in the index fund stand to profit from this increase because of the quick actionof the fund managers.

Sports arbitrage is another one of the most popular arbitrage strategies available.

This strategy involves looking for discrepancies between the major bookmakers in thesports betting industry.A better will take opposing bets from the different sports books and make a profit fromthe discrepancy in the odds.
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Types of Arbitrage

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