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Arbitrage

By Jarosław Wasiński • Published: • Updated:
Using inconsistent valuations through linked transactions that, in a specified model, lock in a positive payoff difference without directional exposure. Actual feasibility depends on executable Bid/Ask, volume, timing, costs and all legs. Partial fills and settlement risk can prevent realisation. A bet on future convergence is not automatically an arbitrage.
Example. Suppose simultaneously available EUR/USD Ask = 1.1002, USD/JPY Ask = 150.02 and EUR/JPY Bid = 165.10. Selling EUR 1 yields JPY 165.10; buying it back via USD costs 1.1002 × 150.02 = JPY 165.052004. The JPY 0.047996 difference is before fees and exists only if every leg can be executed on these terms.

Use executable quote sides

Comparing midpoints may reveal a discrepancy that cannot actually be bought or sold. Specify each leg’s direction, Bid or Ask, units and amount. Prices must be simultaneously available for the required volume, rather than taken from different moments or a stale feed. Include every conversion in the calculation.

Execution risk remains

In an ideal model, a locked-in set of payoffs removes directional risk. In practice, one leg can be rejected, delayed or only partially filled. Costs, financing, collateral, counterparty and settlement risk remain. A difference calculated on screen is not an already realised profit, and faster access does not establish risk-free execution.

Arbitrage versus a convergence hypothesis

Buying a relatively cheap instrument and selling an expensive one in anticipation of later convergence is generally a relative-value trade, rather than a certain arbitrage. The difference may persist or widen. Restrictions on particular methods or use of delayed quotes depend on the agreement and market rules; they are not universal properties of every arbitrage strategy.

FAQ

Is a discrepancy between Mid rates enough?
No. Check executable Bid/Ask, volume, simultaneity and the cost of all legs.
Does arbitrage always mean a certain immediate profit?
Only under the supporting ideal assumptions. Actual execution, settlement and constraints can alter or eliminate the difference.

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Jarosław Wasiński

Editor-in-chief, ForexMechanics.com • Macro & FX analyst

Independent analyst and practitioner with over 20 years of experience in financial markets. Actively involved in Forex since 2007, with a focus on fundamental analysis, OTC market structure, and disciplined capital risk management.

  • Creator and editor-in-chief of MyBank.pl, providing reliable financial education since 2004.
  • Author of hundreds of in-depth market commentaries, structural analyses, and educational materials for traders and investors.
  • Advocate for market transparency, promoting education grounded in hard data and institutional reports (BIS, ESMA, CFTC).

All content is educational and informational only – it does not constitute investment advice or a recommendation. Remember: leveraged trading (Forex/CFD) carries a high risk of rapid capital loss.