The Risk of Forex Arbitrage

forex-arbitrage.jpgWhat is Arbitrage? arbitrage is the practice of taking advantage of a state of imbalance between two or more markets, a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices. A person who engages in arbitrage is called an arbitrageur.

 

For example, if you can buy items at one price at a factory outlet and sell them for a higher price on an internet auction website such as eBay, you can exploit the imbalance between those two markets for those items. However, is usually applied only to trading in money and investment instruments such as stocks, bonds, and other securities, not to goods, and the difference in prices is usually referred to as “the spread”, so arbitrage is often defined as “playing the spread” in the money market.

 

Arbitrage has the effect of causing prices in different markets to converge. As a result of arbitrage, the currency exchange rates, the price of commodities, and the price of securities in different markets all tend to converge to a fixed price. The speed at which the prices converge is one measure of the efficiency of a market.

 

Traditionally, arbitrage transactions in the securities markets involve high speed and low risk. At some moment a price difference exists, and the problem is to execute two or three balancing transactions while the difference persists. Arbitrage tends to reduce price discrimination by encouraging people to buy an item where the price is low and resell where the price is high. Sellers of goods and services often attempt to prohibit or discourage arbitrage.

 

 

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