Can you smart guys explain to me

[BYU71]

Originally Posted by Archaea

I have some clients who claim to be experts in the field, and I just do the documents for certain organizational matters. But it bugs me I can't figure out what they're doing.

Can you at least explain some of the theories.

Stock X is being bought out at $40 a share. However it is currently trading at $39.50. An abitrager will step in and buy the stock at $39.50. He will have to factor in how long before the deal closes and the interest he could have made on the $39.50 vs the .50 gain.

It can get a lot more complicated when you have supposed imbalances in currencies, interest rates, futures , etc.

[Archaea]

Originally Posted by BYU71

Stock X is being bought out at $40 a share. However it is currently trading at $39.50. An abitrager will step in and buy the stock at $39.50. He will have to factor in how long before the deal closes and the interest he could have made on the $39.50 vs the .50 gain.

It can get a lot more complicated when you have supposed imbalances in currencies, interest rates, futures , etc.

Because trades are not simultaneous and you're banking on a small difference in different markets, you have to buy a lot to make enough?

And if any party fails to perform and you have borrowed money, you're screwed?

[hyrum]

Originally Posted by BYU71

Stock X is being bought out at $40 a share. However it is currently trading at $39.50. An abitrager will step in and buy the stock at $39.50. He will have to factor in how long before the deal closes and the interest he could have made on the $39.50 vs the .50 gain.

It can get a lot more complicated when you have supposed imbalances in currencies, interest rates, futures , etc.

This is the arbitrage I am most familiar with. They have to factor in whether the deal might fall trhough, whether there might be another bidder, etc. If its rock solid that there is no other bidder, the price will hold, and the deal will close, it is just a matter of the "time value of money". The arbitrage is just to give the seller his money today for a transaction that will close, and pay in cash, in the future. That difference should be on the order of the margin rate times the time difference.

There are other arbitrages, say seeing a low offer on a stock or currency in one market then turnaround and selling it at a better bid in another country or on another exchange. Of course once that is done the markets will often move back into alignment. I think it would be rare for an individual to regularly make money in such a fashion because the differences are rather small and the retail commisions and bid/ask spreads would eat up your potential profits.

[Flystripper]

Originally Posted by Archaea

some fundamental principles of arbitrage.

What are the fundamental assumptions? From what very little I know it involves the exchange of interest rates, but perhaps that's too simplistic.

Are there any good reads on the subject?

Arbitrage is riskless profit of any kind. What kind of arbitrage are you wondering about? Interest rate? Exchange rate? With transaction costs and efficient global markets true arbitrage is nearly impossible.