|
Title: Who is an arbitrageur? How does an arbitrageur make money? Post by: borteleto on Jul 6, 2018 Who is an arbitrageur? How does an arbitrageur make money?
Title: Who is an arbitrageur? How does an arbitrageur make money? Post by: guzman on Jul 6, 2018 The foreign exchange quotes in two different countries must be in line with each other. If the exchange rate quotations between the London and New York spot exchange markets were out of line, then an enterprising trader could make a profit by buying in the market where the currency was cheaper and selling it in the other. Such a buy-and-sell strategy would involve a zero net investment of funds and no risk bearing, yet it would provide a sure profit. A person executing this strategy is called an arbitrageur, and the process of buying and selling in more than one market to make a riskless profit is called arbitrage. Spot exchange markets are efficient in the sense that arbitrage opportunities do not persist for any length of time. That is, the exchange rates between two different markets are quickly brought in line, aided by the arbitrage process. Arbitrage eliminates exchange rate differentials across the markets for a single currency, as in the preceding example for the New York and London quotes.
|