Arbitrage, a seemingly high-end term, is actually hidden in life. I remember briefly explaining foreign exchange arbitrage before Ben Ben, that is, offshore and onshore RMB arbitrage. But in fact, foreign exchange arbitrage is far more than that.

Bilateral arbitrage

Super easy to understand, the principle is the same as offshore and onshore arbitrage, only the price difference! According to the current market price, Euro/USD is 1. 1929. Suppose the quotation in London is 1. 1900, while the quotation in new york is subject to the market price, that is, 1. 1929. In other words, the euro can be exchanged for more dollars in new york, but not in London. Obviously, buying euros at a low price in London and selling them at a high price in new york has a price difference of 0.0029. Is it simple? Then look down.

Tripartite arbitrage

Don't be afraid, the principle is the same, just adding a currency on the basis of bilateral arbitrage. For example, Benben now converts dollars into euros, and then converts euros into RMB. (The following exchange rates are all real-time exchange rates when the current code word is used.)

For example, Euro/USD or 1. 1929, and Euro /CNY is still 7.78 14. Benben first changed 100 dollars into 83.83 euros (100/1.1929).

What if Benben doesn't? What if I just change it? Direct quotation of USD to RMB: USD /CNY 6.5285, USD 100 can be directly converted into RMB 652.85. Unfortunately, there are more than before! That fool must be corrected directly! But if the exchange rate changes, there is no 652.85, only 652.00? That shows that the first method has arbitrage space, which is trilateral arbitrage.

(non-) dumping arbitrage

Of course, if arbitrage was so simple, there wouldn't be so many derivatives. We can order some more difficult ones, called arbitrage and no arbitrage.

Their arbitrage principle is very similar to futures. Offset arbitrage refers to selling forward foreign exchange in the forward foreign exchange market when the local currency is converted into foreign currency at the spot to lock in the future exchange rate. In this case, when the foreign currency converted into local currency expires, it can be converted back into local currency at a predetermined exchange rate.

Take the above as an example. We bought euros at 1. 1900 in London and converted them into US dollars at the spot exchange rate of 1. 1929 in new york. But what if we switch back to the euro and the dollar depreciates? It became 1.2000. If you want to change it back, won't it be a loss? So I made a write-off: I bought dollars and sold euros at the spot price of 1. 1900, and agreed to buy dollars at a fixed price or 1. 1929 in the future. (Cost such as write-off or swap is not considered. )

If you don't understand, yes! We take 1: 1. 1 rice as an example:

Benben's hometown is in Jiangxi. Assuming that Jiangxi 10 can sell 20 pieces of mixed rice in Shanghai, and assuming that it can cross Kazakhstan (though unreliable), Benben can continuously sell Jiangxi's mixed rice to Shanghai and make money by using the price difference between the two places. However, Benben is afraid that the price of mixed rice in Shanghai will drop. For example, due to fierce competition, the price of 1: 1 rice dropped to 15 yuan, so Benben's profit would be reduced.

In order to hedge this risk, Benben posted an advertisement on every 1: 1. 1% rice in Shanghai: imported from Jiangxi, delicious, no price increase, 20 yuan forever. This is equivalent to the forward contract mentioned above.

Sure enough, after one month, the price of Shanghai 1: 1 rice really dropped, but the "agreement" between Benben and the customer's subconscious will not change, so our 1: 1 rice can still be sold for 20 yuan.

This example may be far-fetched, but at least it can help to understand the principle of arbitrage. Selling means converting the local currency into foreign currency at the current price, but in order to prevent the risk of fluctuation, a "patch" is made to lock the forward price at a certain level. Generally speaking, spot and forward are opposite operations: spot buying, forward selling, spot selling and forward buying. Instead of throwing it away, the simple understanding is that it doesn't help.

This article comes from Caijing News and is authorized by entrepreneurs. It has been slightly edited and modified, and the copyright belongs to the author. The content only represents the author's independent views.