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    "Arbitrage" in Foreign Exchange Market

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    Kajal Chaudhary
    Arbitrage is the simultaneous purchase and sale of currencies, securities, or other financial instruments in different markets to profit from temporary price differences. It allows traders to make risk-free profits from these brief price discrepancies. For example, a trader could buy stock trading at Rs. 2000 in one market and immediately sell it at Rs. 2500 in another. Arbitrage opportunities exist due to market inefficiencies but are typically short-lived as algorithmic trading quickly eliminates any price differentials. By transferring currency from low to high exchange rate markets, arbitrage corresponds rates and stabilizes foreign exchange.

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    "Arbitrage" in Foreign Exchange Market

    Uploaded by

    Kajal Chaudhary
    238 views1 page
    Arbitrage is the simultaneous purchase and sale of currencies, securities, or other financial instruments in different markets to profit from temporary price differences. It allows traders to make risk-free profits from these brief price discrepancies. For example, a trader could buy stock trading at Rs. 2000 in one market and immediately sell it at Rs. 2500 in another. Arbitrage opportunities exist due to market inefficiencies but are typically short-lived as algorithmic trading quickly eliminates any price differentials. By transferring currency from low to high exchange rate markets, arbitrage corresponds rates and stabilizes foreign exchange.

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    Arbitrage

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    Arbitrage is the simultaneous purchase and sale of currencies, securities, or other financial instruments in different markets to profit from temporary price differences. It allows traders to make risk-free profits from these brief price discrepancies. For example, a trader could buy stock trading at Rs. 2000 in one market and immediately sell it at Rs. 2500 in another. Arbitrage opportunities exist due to market inefficiencies but are typically short-lived as algorithmic trading quickly eliminates any price differentials. By transferring currency from low to high exchange rate markets, arbitrage corresponds rates and stabilizes foreign exchange.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    238 views1 page

    "Arbitrage" in Foreign Exchange Market

    Uploaded by

    Kajal Chaudhary
    Arbitrage is the simultaneous purchase and sale of currencies, securities, or other financial instruments in different markets to profit from temporary price differences. It allows traders to make risk-free profits from these brief price discrepancies. For example, a trader could buy stock trading at Rs. 2000 in one market and immediately sell it at Rs. 2500 in another. Arbitrage opportunities exist due to market inefficiencies but are typically short-lived as algorithmic trading quickly eliminates any price differentials. By transferring currency from low to high exchange rate markets, arbitrage corresponds rates and stabilizes foreign exchange.

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    “Arbitrage” in Foreign Exchange Market

    https://businessjargons.com/arbitrage-in-foreign-exchange-market.html

    Definition: Arbitrage is the process of a simultaneous sale and purchase of currencies in two or
    more foreign exchange markets with an objective to make profits by capitalizing on
    the exchange-rate differentials in various markets.

    The arbitrage opportunities exist due to the inefficiencies of the market.


    While dealing in the arbitrage trade, an individual can make profits only out of
    price differences of similar or identical financial instruments traded on different
    exchange markets. Thus, the price differential is captured as a trade’s net
    payoff. This payoff should be large enough to cover the expenses incurred in
    executing the trade.

    For example: Suppose the stock of company A is trading at Rs 2000 on BSE


    while the same stock is trading on NSE at Rs 2500. A trader can earn a profit of
    Rs 500 by buying the stock on BSE and immediately selling the same shares on
    NSE. This arbitrage opportunity can be availed until BSE runs out of shares of
    company A or until BSE and NSE adjusts the price differences so as to wipe out
    the arbitraging opportunity.

    The importance of arbitrage lies in its ability to correspond foreign exchange


    rates in all the major foreign exchange markets. The arbitraging involves the
    transfer of foreign exchange from the market with a lower exchange rate to the
    market with a higher exchange rate. Hence, arbitraging equates the demand for
    foreign exchange with its supply, thereby acting as a stabilizing factor in the
    exchange markets.

    The arbitrage opportunity can be availed only where the foreign exchange
    is free from controls, and if any, controls should be of limited significance. If
    the sale and purchase of foreign exchange are under severe control and
    regulation, then the arbitrage is not possible. Practically, the arbitrage
    opportunity exists for a very brief periodsince in the mature markets the most
    of the trading has been taken by the algorithm-based trading (a trading
    system that relies heavily on mathematical formulas and computer programs to
    determine the trading strategies). These algorithm-based trading are quick to
    spot and is quite easy for a trader to keep track.

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