Lesson_51_Arbitrage - Arbitrage Arbitrage is the process of making a riskless profit from finding price discrepancies in the market and exploiting

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1 Lesson 51 1 Arbitrage Arbitrage is the process of making a riskless profit from finding price discrepancies in the market and exploiting them In this lesson, we explore two kinds of arbitrage as applied to the FX market Locational arbitrage and triangular arbitrage Lesson 51 2 The FX market is global, operating 24/7 When London banks open for business, NY is still asleep By the time banks in LA and Francisco come on line, London is shutting down By the time NY wakes up, it is midday in London Lesson 51 3 Information travels instantly over the web and by phone E.g., pounds are traded for dollars in London and NY at the same time The same currencies are being traded in geographically separated markets Locational arbitrage ensures that the exchange rate is the same in both locations
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2 Lesson 51 4 Example: London is 5 hours ahead of NY This is 8:00 AM in NY At 1:00 PM GMT, Barclays is reporting an exchange rate of $1.92 per pound (ignore bid/ask spread) What if Chase is reporting an exchange rate of $1.90 per pound?
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This note was uploaded on 09/14/2009 for the course ECON 340 taught by Professor Leidholm during the Summer '08 term at Michigan State University.

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Lesson_51_Arbitrage - Arbitrage Arbitrage is the process of making a riskless profit from finding price discrepancies in the market and exploiting

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