What Is Arbitrage?
The rapid development of financial markets is increasing the investment and earnings opportunities both in financial instruments and financial markets. I will try to explain the increasing arbitrage of globalization in the last five to ten years.
Arbitrage is the return obtained by buying a commodity, which is a financial value, from a cheap market, selling the same commodity at the same price, without risk, on a different market at a higher price. The opportunity for arbitrage rarely arises from a sudden oversupply of supply or demand, which has distorted the market balance.
How is Arbitrage Done?
Arbitrage transactions do not take place only in spot markets (markets where instant trading takes place) as in the example above. Arbitrage, however, may also arise from a pricing problem between the spot price of a financial good and the price of futures. In other words, arbitrage opportunities arise as a result of prices moving away from theoretical prices.
We will determine whether there is arbitrage possibility in our example. If there is equality on both sides of the formula, we can make arbitrage impossible and interpret the prices correctly. In the opposite case, that is, if the equality is not achieved on both sides of the formula, we can make transactions in the currencies that we have found to be invaluable.
The equality implies the departure from the theoretical price, which should not be equal to each other, and provides arbitrage opportunities for financial actors. When BRL needed to gain 1%, 1.35% was valued and overvalued. While it would have to depreciate 1% if we were to assess for USD, it depreciated 1.25%. It has become overvalued. If you have difficulty in putting this in perspective, it will be enough to remember that the currency of the higher interest rate country should lose more value.