Arbitrage on Forex

The arbitrage concept means several ‘buy’ or ‘sell’ deals in order to profit from unequal prices of the same or resembling assets at the same time in different markets or in one market, but at different times.

Also there is the concept as Forex arbitrage. It is ‘buy’ or ‘sell’ operations made by a trader and a required further reverse deal for the purpose of making profit.

Controlling its risk, Forex arbitrage can be very beneficial. The meaning of Forex arbitrage is following: profit is made by mean of buying/selling of financial instruments at different times. In addition, a trader has opportunity to complete financial transaction in different market. Forex arbitrage means obligatory making both buy/sell deal in Forex and a reverse operation, which will bring a profit.

There are several types of arbitrage available. It is simple arbitrage, which involves using of just two currencies and a complicated type, which involves trading with three and more currencies.

Depending on what profit one can make there are following types of arbitrage:

- Temporary arbitrage is the most accepted type of arbitrage. Its meaning is in quotes difference of currency pairs at different times. The temporary arbitrage can be of two kinds:

1. “Purchase-Sale”. A trader buys a currency at a lower price in order to sell it at a higher price and get profit.

2. “Sale-Purchase”. Trader sells currency at higher price in order to buy at lower price in the future.

- Crossing arbitrage is one of the most complicated types of arbitrage. During the crossing arbitrage simultaneous synchronous exchange rates changing takes place in two pairs. Such cross-imbalances appear in Forex all the time.

- Intermarket arbitrage occurs in case of if you want to earn on exchange rates difference in different currency markets.

However, the using of Forex arbitrage is not always profitable, as in today’s conditions exchange rates in various exchanges do not differ often that does not allow traders to obtain additional profit.

The main essence of arbitrage is the complication of fixed-date buy/sell deals of currency options. The option must be executed without fail and its conditions depend on its type and the conditions of the contract.

In general, the choice of strategy depends on many factors related to each other, which trader must consider during the trading.

Added by Alexandr Kornilov,
InstaForex Clients’ relationship manager

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2 Responses to “Arbitrage on Forex”

  1. Henny says:

    Very useful article for newbies, thanks for adding.

  2. In addition to hedging.

    Thanks for the article.

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