Arbitrage in Trading

 What Is Arbitrage in Trading?

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Arbitrage is the simultaneous purchase and sale of the same or similar asset in different markets in order to profit from tiny differences in the asset’s listed price. It exploits short-lived variations in the price of identical or similar financial instruments in different markets or in different forms.
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Arbitrage trades are made in stocks, commodities, and currencies.
Arbitrage takes advantage of the inevitable inefficiencies in markets.
By exploiting market inefficiencies, however, the act of arbitraging brings markets closer to efficiency.
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Understanding Arbitrage

Arbitrage can be used whenever any stock, commodity, or currency may be purchased in one market at a given price and simultaneously sold in another market at a higher price. The situation creates an opportunity for a risk-free profit for the trader.

1. Examples of Arbitrage in stock Trading.
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As a straightforward
example of arbitrage, consider the following:

The stock of Company X is trading at $20 on the New York Stock Exchange (NYSE), while, at the same moment, it is trading for $20.05 on the London Stock Exchange (LSE).
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A trader can buy the stock on the NYSE and immediately sell the same shares on the LSE, earning a profit of 5 cents per share.

The trader can continue to exploit this arbitrage until the specialists on the NYSE run out of inventory of Company X’s stock, or until the specialists on the NYSE or the LSE adjust their prices to wipe out the opportunity.
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2. Another type of
Arbitrage is called TRIANGULAR.

This Arbitrage opportunity can be found in trading of fiat currencies
In this case, the trader converts one currency to another, converts that second currency to a third 🏦 bank note, and finally converts the third currency back to the original currency.

Suppose you have $1 million and you are provided with the following exchange rates: USD/EUR = 1.1586, EUR/GBP = 1.4600, and USD/GBP = 1.6939.
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Explaining the terminology above:
USD =United States dollar
EUR=  Euro
GBP=  Great Britain pound

With these exchange rates, there is an arbitrage opportunity:

Sell dollars to buy euros: $1 million ÷ 1.1586 = €863,110
Sell euros for pounds: €863,100 ÷ 1.4600 = £591,171
Sell pounds for dollars: £591,171 × 1.6939 = $1,001,384

Subtract the initial investment from the final amount: $1,001,384 – $1,000,000 = $1,384
From these transactions, you would receive an arbitrage profit of $1,384💲 (assuming no transaction costs or taxes).

NOTE: How Does Arbitrage Work?

Arbitrage is a trading that exploits the tiny differences in price between identical or similar assets in two or more markets. The arbitrage trader buys the asset in one market and sells it in the other market at the same time to pocket the difference between the two prices.
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The Bottom Line :

Arbitrage is a condition where you can simultaneously buy and sell the same or similar product or asset at different prices, resulting in a risk-free profit.

I think we understand what the arbitrage is?
I took time to give different examples so that we can understand it better.

Please read the bottom line again and again, because we will still need to refer to it. ( Resulting in a risk free profit)

Meet you in the next class.
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SEE YOU SUCCEEDING 💎🛫

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