Forex Arbitrage Problems and Others

A Guide to Forex Arbitrage Trading | Admiral Markets

There are some cases that could hinder or prevent arbitrage. A discount or premium might result from currency market liquidity differences, which is not a price anomaly or arbitrage opportunity. And this makes it more challenging to perform trades to close a position.

Because arbitrage demands fast execution, s slow trading platform or trade entry delays can limit opportunity. Aside from that, time sensitivity and complex trading calculations need real-time management solutions to control operations and performance. This requirement ended up in the use of automated trading software to scan the markets for price differences to execute forex arbitrage.

Most of the time, forex arbitrage requires lending or borrowing at near to risk-free rates, which are mostly available only at large financial institutions. Also, the cost of funds may limit traders at smaller banks or brokerages. Then, spreads, trading, and margin cost overhead are other risk factors to consider.

Other Included Forex Arbitrage

  • Currency arbitrage has the exploitation of the differences in quotes instead of movements in the exchange rate of the currencies in the currency pair.
  • For a cross-currency transaction, it consists of a couple of currencies traded in forex. However, this does not include the U.S. dollar. Now, ordinary cross currency rates include the Japanese yen. Also, arbitrage aims to exploit pricing among the currency pairs or cross rates of different pairs.
  • Covered interest rate arbitrage is the method of using favorable interest rate differentials to invest in a higher-yielding currency. Also, they can hedge the exchange risk via a forward currency contract.
  • Lastly, in spot-future arbitrage, it takes positions in the same currency in the spot and futures markets. For instance, let’s say a trader will buy currency on the spot market. At the same time, the trader sells the same currency in the futures markets if seen as a beneficial pricing discrepancy.

Points to Remember

  1. Keep in mind that forex arbitrage is a trading strategy that looks for a way to exploit price discrepancy.
  2. All market participants engaging in arbitrage helps the market to be more efficient.
  3. Finally, every type of arbitrage generally depends on unusual circumstances that are temporarily extant in the markets.