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PowerPoint presentation on Arbitrage

Arbitrage is the practice of exploiting price discrepancies of the same asset across different markets for profit, with various types including spatial, temporal, statistical, triangular, and convertible arbitrage. It is commonly applied in forex, stock, and commodity markets, but comes with risks such as market volatility and execution challenges. While arbitrage contributes to market efficiency and liquidity, it requires a deep understanding of market dynamics and transaction costs.

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Rishabh Dev
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12 views

PowerPoint presentation on Arbitrage

Arbitrage is the practice of exploiting price discrepancies of the same asset across different markets for profit, with various types including spatial, temporal, statistical, triangular, and convertible arbitrage. It is commonly applied in forex, stock, and commodity markets, but comes with risks such as market volatility and execution challenges. While arbitrage contributes to market efficiency and liquidity, it requires a deep understanding of market dynamics and transaction costs.

Uploaded by

Rishabh Dev
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Arbitrage

Submitted By-
Aman
Ayush
Mannat
Rishabh
Introduction
• Arbitrage is the practice of exploiting price discrepancies of
the same asset or commodity across different markets to
make a profit.
• The basic principle of arbitrage is that the same asset or
product will have different prices in different markets, and an
arbitrageur (the person or firm engaging in arbitrage) can
take advantage of these differences.
Types of Arbitrage
• Spacial Arbitrage
• When an asset has different prices in different geographical locations
• most common form of this is currency arbitrage, where differences in
exchange rates between different markets or brokers are exploited
• Temporal Arbitrage
• This occurs when the price difference exists between different time
periods for the same asset
• For example, if an asset’s price is expected to rise significantly in the
future due to known factors, an arbitrageur may buy now and sell later.
• Statistical Arbitrage
• strategy in trading that uses mathematical models and statistical methods to identify
opportunities
• The strategy typically involves exploiting small price discrepancies that are expected
to converge over time.
• Triangular Arbitrage
• strategy involves converting one currency into another through a sequence of trades
in three different currencies
• thereby profiting from any inefficiencies or discrepancies in the cross-rates.
• Convertible Arbitrage
• trading strategy that involves the simultaneous buying of a company's convertible
bonds and selling short the company's underlying stock
• This strategy seeks to profit from the difference between the bond's price (which can
be converted into stock) and the current stock price
Arbitrage in
Different
Markets
Forex Market

• The most common example of arbitrage happens in the foreign


exchange (forex) market, where traders exploit small discrepancies in
exchange rates between different currency pairs.
• For instance, a currency might be undervalued on one exchange relative
to another, and arbitrageurs can make profits by buying it on the
cheaper exchange and selling it on the more expensive one.
Stock Market
• when the same stock is listed on multiple
exchanges (known as cross-listing).
• The price of the stock may differ slightly on
each exchange due to supply and demand
fluctuations, which provides an opportunity
for arbitrage.
Commodity Market
• In commodity markets (like oil, gold, or agricultural
products), arbitrageurs may exploit differences in
the price of a commodity in different regions or
between the spot market (immediate delivery) and
the futures market (delivery at a later date).
Sudden and unexpected
market events, such as a
financial crisis or a large news
event, can cause rapid shifts
in asset prices, potentially
erasing the arbitrage price
differential.
• There might not be enough volume
in one of the markets to execute a
large arbitrage trade without
affecting the price.
• In fast-moving markets, the prices
might change between the time an
arbitrageur identifies an
opportunity and the time they
execute the trade.
• Model risk in arbitrage refers to the
potential for losses or mispricing in an
arbitrage strategy that arises from errors
or inaccuracies in the models used to
identify or exploit arbitrage opportunities.
• If the arbitrageur is working with
multiple brokers or exchanges,
there's always the risk that one of
the parties may fail to meet their
obligations.
• Arbitrage opportunities may be
influenced by changes in regulations that
could prevent or limit certain types of
arbitrage (for example, changes in
exchange rate controls or tariffs).
Practicality of Arbitrage
• Let’s say you spot an arbitrage opportunity between two exchanges
for the same cryptocurrency, Bitcoin. On Exchange A, Bitcoin is priced
at $25,000, while on Exchange B, it is priced at $25,200. You could buy
Bitcoin on Exchange A and sell it on Exchange B, pocketing a $200
difference per Bitcoin.
• However, to successfully execute this trade, you would need to
account for transaction fees on both exchanges, potential delays in
transferring the Bitcoin between exchanges, and the liquidity on both
exchanges to ensure you can both buy and sell the amount of Bitcoin
you want without significant slippage.
Conclusion
• Arbitrage is a critical strategy in modern financial markets that helps
ensure price efficiency and contributes to market liquidity.
• While it can seem like an easy way to make a profit, it is far from risk-
free, and modern technologies and market forces have made it a
highly competitive field.
• Understanding arbitrage requires knowledge of different types of
markets, transaction costs, and the ability to quickly identify price
discrepancies.

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