- What Is Forex Arbitrage?
- Why Are Spot and Forward Prices Different?
- DeFi #2 - Arbitrage and Carry Trade Strategies
- Interest Rate Arbitrage in Negative Yielding Currencies · The Hedge Fund Journal
Hence, it would have been worth conducting this trade as long as the following inequality holds:. In the strategy defined in the preceding subsection, there were some key constraints to consider to assess the profitability of the profitability strategy:.
What Is Forex Arbitrage?
Eventually, this opportunity ended once the stability fee was hiked several times , through a series of votes by MKR token-holders. Part of the DeFi Series, this report discussed several arbitrage strategies along with carry trades in the Ethereum space. On the other hand, different risk profiles between DAI and USDC may explain this persisting divergence between their respective interest rates. Furthermore, new aspects must also be considered for future analysis like oracle price arbitrage opportunities or additional decentralized platforms like Uniswap.
Ultimately, interest rate swaps 25 or markets to hedge against the direction of interest rates 26 could further bring a whole new range of trading opportunities. Exchange Blockchain and crypto asset exchange. Academy Blockchain and crypto education. Binance Charity Blockchain charity foundation. Info Cryptocurrency information platform. Launchpad Token launch platform. General definition s 2.
Why Are Spot and Forward Prices Different?
DeFi-CeFi case studies 3. Pure DeFi arbitrage and carry trade strategies 4. Share this article. Interest rate arbitrage in the DeFi space refers to taking advantage of interest rate differences across DeFi platforms. DeFi-CeFi arbitrage also exists when there are interest rate differences between centralized and decentralized platforms.
Conversely, carry trade strategies may be pursued , i. Several potential market inefficiencies may subsist both within DeFi and with CeFi platforms, which can be explained by the following reasons: Nascency of the DeFi space: illustrated by low liquidity, visible on the size borrowable amounts and daily volumes transacted relatively to CeFi. Platform-specific risks: interest rate volatility, potential smart-contract issues, loan matching uncertainty, redemption risks, etc. Eventually, as the DeFi space matures, new opportunities are expected to become more scarce. Interest rates across platforms should also converge, as long as assets and platforms share similar risk characteristics.
New platforms and protocols like interest rate swaps may contribute to a broader range of trading opportu. You could sell your pounds to buy euros, and use them to buy securities such as government bonds. When the bonds mature, the euros are then converted back to pounds. While this strategy can be profitable, it can also be risky as exchange rates fluctuate.
DeFi #2 - Arbitrage and Carry Trade Strategies
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Our Global Offices Is Capital. Forex arbitrage, as with arbitrage strategies in other markets, relies on these irregularities, which arise occasionally when markets trade inefficiently. Arbitrage trade calculations , which were once done largely by hand or hand-held calculators, are now done in a number of way including forex arbitrage calculators, purpose made software programs, and even some trading platforms. Because of the proliferation of such programs, financial markets have become even more efficient, which has further reduced the arbitrage opportunities in the forex market.
Several different methods can be used to arbitrage the forex market. For example, one such arbitrage technique involves buying and selling spot currency against the corresponding futures contract. Another form of currency arbitrage is called triangular arbitrage, which takes advantage of exchange rate discrepancies using three related currency pairs.
Other more complicated forms of forex arbitrage involve combining currency options , futures and spot; however, this type of arbitrage requires a significant initial margin deposit to execute since the selling of options is required. To add to the complexity of this type of arbitrage, a competent understanding of all three of those markets is imperative in the identification and execution of the arbitrage when it sets up.
Interest Rate Arbitrage in Negative Yielding Currencies · The Hedge Fund Journal
Before the advent of computers, arbitrageurs operating at banks and other financial institutions would work out their numbers with a hand held calculator and a pencil. Nowadays, to accurately identify and act on irregularities in the forex market, a suitable software program that identifies and automatically executes trades is typically used instead.
For retail currency traders, this type of forex arbitrage program generally comes in the form of an Expert Advisor or EA that works within an advanced forex trading platform such as MetaTrader 4 or 5. The EA constantly watches the forex market, and when an opportunity for an FX arbitrage arises, the program automatically executes the trade. Nevertheless, many traders feel uncomfortable with automatically executed trades and prefer to make their own trading decisions.
Such traders generally use trade alert or signal software. This type of software, much like the expert advisor software, constantly scans the market, but instead of automatically executing the trades, it will alert the trader when an arbitrage situation arises.
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The trader can then decide whether or not to act. Some traders that use their own arbitrage software programs may also subscribe to remote signal alert services. Because of interest rate differentials , currency futures tend to sell at a premium or at a discount, depending on how wide the interest rate differential is between the currencies of the two countries involved. If the currency futures contract is for the Pound Sterling quoted against the U. Dollar, for example, and the pertinent interest rate in the UK is at two percent, while U. This is due to the carrying cost differential of one percent since you would be better off buying Sterling spot and holding it until the value date than buying it forward against the Dollar.
The above figures will now be used to illustrate how a six-month futures contract for Sterling can be arbitraged against the spot market. First of all, the following market and contract parameters will be used:. The futures contract can be converted at the option of the seller of the contract into physical currency at the specified exchange rate when the futures contract matures in six months.
The arbitrageur could then sell Sterling forward against the U. Dollar against the long futures contract.