Peter Boulos Dr. Greco Fin 370 May 15, 2009 Financial Arbitrage In the past year the term arbitrage has been heard in the news more often because of the current economic state. The term arbitrage means the practice of taking advantage of a price difference between 2 or more different markets. There are all kinds of different arbitrage opportunities in the financial markets. Arbitrage opportunities happen very quickly and disappear as quickly as they happen. Most arbitrage opportunities come from the different methods of trading. There must be a few things to happen for financial arbitrage to happen When there is an arbitrage in the market place it usually happens very quickly. Some of the things for arbitrage to happen according to Encarta encyclopedia is: • The same asset does not trade at the same price on all markets. • Two assets with identical cash flows do not trade at the same price. • An asset with a known price in the future does not today trade at its future price discounted at the risk-free interest rate Arbitrage is not as easy as it sounds. In is not just the action of buying a product in one market and selling it in another market for a higher price. “The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both transactions are complete.”(De Jong) According to Wikipedia a good example of arbitrage is would be: if the exchange rate in London is exchange rates (after taking out the fees for making the exchange) in London are £5 = $10 = ¥1000 and the exchange rates in Tokyo are ¥1000 = $12 = £6. Converting ¥1000 to $12 in Tokyo and converting that $12 into ¥1200 in London, for a profit of ¥200, would be arbitrage. There are many different types of arbitrage that are used for different securities other than just exchange rate. Bibliography De Jong, A., L. Rosenthal and M.A. van Dijk, 2008, The Risk and Return of Arbitrage in Dual-Listed Companies, May 14, 2009