Arbitrage Opportunity

Interest Rate Arbitrage

Interest Rate Arbitrage Opportunity

Interest rate arbitrage opportunity is a strategy of buying a currency from one bank at its low rate and simultaneously selling to another bank at its high rate.  If forward contract is included in the financial instrument then it is called covered interest arbitrage, otherwise uncovered interest arbitrage. Developed countries have low interest rate, but developing countries such as India and Brazil provide you high-interest rate. You can take the benefit of the interest rate difference between the US (2.5%) and developing markets like India (7%) and Brazil (10%) while keeping in mind that Interest Rate Arbitrage involves a number of risks such as transaction costs, tax policy, supply or demand inelasticity and foreign exchange controls.

Check for arbitrage opportunity

Forward Rate/Spot Rate = (1 + Interest Rate of Base country)/ (1 + Interest Rate of Foreign country)

1. Rb = Interest rate in Base Country

2. Rf = Interest rate in Foreign Country

3. F= Forward Exchange Rate

4. S= Spot Exchange Rate

LHS = F / S
RHS = (1+Rb)/(1+Rf)

Case 0: LHS = RHS. There is no arbitrage opportunity.

Case 1: LHS > RHS.

There is inconsistency between interest rates and forward rates, and thus arbitrage opportunity. In this case, borrow base currency, convert at spot, invest in foreign and convert back to base at forward.

Case 2: LHS < RHS.

There is mismatch between interest rates and forward rates, and thus arbitrage opportunity. In this case, borrow foreign, convert at spot, invest in base and convert back to foreign at forward.

Rf = 0.06

Rb = 0.035

F = $1.325/€

S = $1.345/€

F/S =  $1.325/€  / $1.345/€ = 0.98513
(1+Rb) / (1+Rf) = 1.035 / 1.06= 0.98

There is inconsistency between interest rates and forward rates, and thus arbitrage opportunity.

Sports Arbs

Sports Arbitrage or Sporting Arbitrage
Sport arbitrage or Sporting Arbitrage  is a way of trading which uses difference in odds in several bookmakers, and guarantee you profit with 100% RISK FREE.
Why Sports Arbitrage Opportunity occur?

Sports Arbitrage Opportunities means taking advantage of discrepancies in odds between online bookmakers. The discrepancy happens due to large number of bookmakers and excess number of outcomes for different events. There are more than 250 bookmakers in the internet. Leading bookmakers offer  odds, while other bookmakers, who don’t have a thorough knowledge of every sport, will follow the odds of leading bookmakers. It took time to match their odds with the leading bookmakers, and the mismatch between the odds of the bookmakers creates the arbitrage opportunity.

Lets take a look at this following tennis game:

Arbitrage example 1

 To calculate sporting arbitrage opportunity you want to understand that the odd 1.36 means that placing a money for $1 gives you $1.36 in case of a Simon win.  Now, lets calculate the cost of each odd.

Simon= 1/1.36=.735

Ebden=1/4.33=.231

Total Cost= $.966

This calculation tells us that we will need $0.966 to be sure to get $1. If the result of the calculation is below 1 (0.966 < 1), then you have an arbitrage opportunity.