Currency Arbitrage

Filed Under » , , ,
Dictionary Says

Definition of 'Currency Arbitrage'

A forex strategy in which a currency trader takes advantage of different spreads offered by brokers for a particular currency pair by making trades. Different spreads for a currency pair imply disparities between the bid and ask prices. Currency arbitrage involves buying and selling currency pairs from different brokers to take advantage of this disparity.

For example, two different banks (Bank A and Bank B) offer quotes for the US/EUR currency pair. Bank A sets the rate at 3/2 dollars per euro, and Bank B sets its rate at 4/3 dollars per euro. In currency arbitrage, the trader would take one euro, convert that into dollars with Bank A and then back into euros with Bank B. The end result is that the trader who started with one euro now has 9/8 euro. The trader has made a 1/8 euro profit if trading fees are not taken into account.
Investopedia Says

Investopedia explains 'Currency Arbitrage'

Currency arbitrage involves the exploitation of the differences in quotes rather than movements in the exchange rates of the currencies in the currency pair. Forex traders typically practice two-currency arbitrage, in which the differences between the spreads of two currencies are exploited. Traders can also practice three-currency arbitrage, also known as triangular arbitrage, which is a more complex strategy. Due to the use of computers and high-speed trading systems, large traders often catch differences in currency pair quotes and close the gap quickly.

Articles Of Interest

  1.

    Arbitrage Squeezes Profit From Market Inefficiency

    This influential strategy capitalizes on the relationship between price and liquidity.

  2. An Introduction To Day Trading

    This article will take an objective look at day trading, who does it and how it is done.

  3. Trading The Odds With Arbitrage

    Profiting from arbitrage is not only for market makers - retail traders can find opportunity in risk arbitrage.

  4. A Primer On Cross Currency Triangulation

    This method to transact business in euros while making profits at home is essential. Find out how it's done.

  5. Break Into Forex In 12 Steps

    Learn how to get started in forex trading.

  6. What Forex Traders Need To Know About The Yen

    The Japanese Yen possesses some unique qualities that traders should know before jumping in.

  7. Introduction To Guerrilla Trading

    Guerilla trading can takes a lot of expereince, risk capital and mental fortitude; it is not for the novice investor.

  8. Trade Forex On Herd Instinct

    Use caution and commonsense when making trades according to herd instinct – use stop losses, avoid complacency and plan your exit strategy.

  9. Trading Forex Trends With MACD And Moving Averages

    Although based on short-term trading, keeping the long-term picture in mind will help investors trade with the trend.

  10. Trading The Non-Farm Payroll Report

    Discover how to trade the NFP report without getting knocked out by the irrational volatility it can create.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Yield Elbow

    The point on the yield curve indicating the year in which the economy's highest interest rates occur. The yield elbow is the peak of the yield curve, signifying where the highest interest rates occurred.

  2. Xenocurrency

    A currency that trades in markets outside of its domestic borders.

  3. Wanton Disregard

    A standard of severe negligence. Wanton disregard is a very serious accusation that indicates that a person behaved extremely recklessly.

  4. Ultra ETF

    A class of exchange-traded funds (ETF) that employs leverage in an effort to achieve double the return of a set benchmark.

  5. Toehold Purchase

    A purchase of less than 5% of a target company's outstanding stockmade by an acquiring company. A toehold purchase of just under 5%, while not a significant stake in a firm, allows the shareholders a "toe-holds" grip on the company and its decision making.

  6. Samurai Bond

    A yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.
Trading Center
http://sp.fastclick.net/ad/tr/10858-64082-15546-0?mpt=595cccc228b0b7565de60a768c4c043d