Currency Arbitrage

Podcast Duration: 05:36

Hi friends and welcome to this podcast by Angel One.

Is podcast mein hum discuss karenge ek bahut cool strategy that traders use in the currency markets. Doston do you know that currency markets ko forex markets bhi bolte hain? Well, now you do, kyunki is term ko hum is podcast mein frequently use karenge. Forex sounds cool, right?

Are you new to the forex exchange market? Stock market ke basics toh aap jante hi hoge, right?

Toh chaliye arbitrage ka matlab samajhte hain, with an example from the stock market.

Gaurav ne teen saal pehle trading karna shuru ki, when he had made enough money from his day job, and saved it to start trading full time. Doston aise devoted traders alag hi level of expertise attain karte hain. Toh Gaurav ne market mein trade karte hue ye observe kiya, ki ek stock ki price alag alag exchanges par different hoti hai - not always, but sometimes. Toh usne socha, ki is difference ko kyun na exploit kiya jaaye. With some research, he actually did it too!

Kya aap jaanna chahte ho ki how Gaurav accomplished this?

Well, it’s not that difficult to understand. Basically, Gaurav ne ek point par kuch stocks khareed liye, aur saath hi usne buy kiye futures for the same amount. Let’s suppose ki stocks ki price 240 rupees thi, aur next month ke liye futures contract trade ho rahe the 243 pe. Toh Gaurav ne futures contract khareed kar sell kar diye, aur jab woh contract expire hue, toh woh 3 rupees ka spread convert ho gaya profit mein. Cool, right?

Doston is strategy ko bolte hain cash-carry arbitrage, ya fir cash-futures arbitrage.

To make this work, aapki order size should be large enough to make a sizable profit. Saath hi, transaction costs low hona zaroori hain. Otherwise, small profit will get eaten up by the transaction costs.

Achcha ab focus shift karte hain currency markets pe. Currency markets mein agar aap kisi currency pair ki ask-bid spread ko exploit karna chahte ho, toh uske liye there are many currency arbitrage strategies. Aur dosto ye hoga hamara focus, for the rest of this podcast.

Friends, sabse pehle currency markets ke kuch basics par dhyaan dete hain.

Firstly, currency markets mein ask-bid spread usually bahut chota hota hai. Isliye, for arbitrage to work, aapke paas aise broker ka access hona chahiye, jo aapko bahut low transaction prices par trades execute karne ki facility de paaye.

Makes sense, right?

Saath hi, another thing to remember is that forex markets are usually fast moving markets. On top of this, because of heavy trading volume, ask-bid spreads close very fast. Toh currency markets mein arbitrage strategies mein risk management plays an important part.

Toh what are some common currency arbitrage strategies? Chaliye dekhte hain -

Number 1 - Two point arbitrage.

Doston ye strategy bahot simple hai. Isme traders koi currency ek market mein buy karke kisi geographically different market mein sell karte hain. Lekin how? Currency ke exchange rates internationally same hona chahiye, right? Well, theoretically, yes.

Lekin in reality, har asset ki supply aur demand ka gap fill hone mein time lagta hai. Arbitrage traders play within this small time frame. Isme agar transaction costs are smaller than the spread, then two-point arbitrage ek simple aur almost risk-free strategy hai.

Sounds cool? Then check out the next one.

Number 2 - Three point arbitrage

Friends, this may sound complicated at first, lekin example ke saath dekhenge tab you’ll understand very easily. Three point arbitrage mein basically teen currency pairs ko examine kiya jaata hai. Example ke liye maan lijiye Rupee, Dollar aur Euro. Friends, imagine ki aap teeno ke beech ke exchange rates dekhte ho, and you notice something interesting. Aapne dollar aur euro ka exchange rate dekha, and you observe: 1 EUR = 1.6 USD

Lekin fir aap dekhte ho, ki agar 1 EUR ko rupee mein convert kiya jaaye, aur in rupees ko dollar mein convert kiya jaaye toh 1 EUR = 1.7 USD.

Is tarah ki arbitrage trading ko ko bolte hain three point arbitrage. While this may look complicated, jab aa arbitrage ke concept se familiar ho jaaoge, toh aap bhi is strategy ko use kar paaoge like a pro.

Toh kya aap taiyaar ho 3rd strategy ke liye? Then let’s check out.

Number 3 - Covered interest arbitrage:

Maan lijiye ki aap ek Indian investor hain, aur aap dekhte hain ki indian rupee mein interest rates low hain, lekin us dollar is riding on high interest rates. Is interest rate differential ko dekhkar aap decide karte ho, ki investing in dollars is cool, lekin you are worried about the risk involved in the exchange.

Is risk ko aap ek forward future contract se cover kar lete ho, aur interest rate ke differential se you make money. Sounds interesting? Is strategy ko investors covered interest arbitrage bolte hain.

Are you interested in exploring more about arbitrage trading in the forex market. Then visit, and find out all about how to invest right in the currency market.

Toh friends, aaj ke podcast mein itna hi.

Milte hain next episode mein. Tab tak ke liye goodby from Angel One, and happy investing!