What is an arbitrage fund

Arbitrage - Lexicon from FondsClever.de

Arbitrage is the exploitation of price, interest rate and price differences on different exchanges or markets. Either the achievement of a profit or the avoidance of a loss is intended. Usually this is associated with very little or no risk of loss. However, the increasing digital networking of stock exchanges and computer trading reduce the opportunities for arbitrage business. They only work when as few people as possible know about the current price differences. As soon as many traders take advantage of the arbitrage, the prices level out and the chance is wasted. There are different types of arbitrage. They differ according to the economic goods.

Arbitrage: securities arbitrage

This is about the exploitation of existing price and exchange rate differences for securities at a certain point in time on different exchanges. Again, there are different types, namely differential arbitrage and equalization arbitrage. The difference lies in the goal setting. One goal is to buy securities cheaply on one stock exchange and then sell them at a higher price on another (differential arbitrage). The second option is to buy a security at the cheapest price and then hold it or to sell a security that is already in the portfolio on the most expensive stock exchange (equalization arbitrage).

Currency arbitrage

This is the use of temporary exchange rate differences on at least two different foreign exchange markets, whereby the exchange rate differences are reduced or eliminated entirely. Compensation arbitrage and differential arbitrage are grouped under the umbrella term spatial arbitrage in forex trading. In equalization arbitrage, the activity is limited to tracking down the most favorable rate for the necessary purchase or sale of a currency. However, if a counter-deal is concluded at the same time, a differential arbitrage exists. The identification and exploitation of exchange rate differences in foreign exchange trading are made significantly more difficult by the improved information technology. Deviating rates are rare these days.

Interest rate arbitrage

Interest rate arbitrage is about stock market transactions that exploit interest rate differentials. The stock exchanges are always in different places. Especially in other countries, which means that the currencies are mostly different. Interest rate arbitrage can take place between interest rate positions with the same maturity, but also between those with different maturities (interest time arbitrage). In addition to the free movement of capital, this requires good information and communication links and usually requires quick reactions.