Arbitrage.. the magic word of finance.. sounds exotic to newcomers. If you are in a cocktail dinner and you want to appear smarter than you are just say to somebody “It’s all about finding arbitrage in the market” and see how you put the people around you in awe.
Arbitrage is basically in simple terms “making money out of nothing”. There is no risk involved. But sometimes people abuse this term or are not aware of a hidden risk.
Here is an example of a situation that is NOT an arbitrage opportunity: Suppose a company, let’s call it company A, announces to the market she is offering to buy another company, let’s call it B, for 100 NIS a share. We’ll assume company B is priced at 90 NIS per share. The news make the stock jump to 95 NIS per share and you, the layman who has heard all about arbitrage, thinks this is your shot to make a lot of money. You go buying a lot of shares at 95 each and then wait for the company A to purchase company B at 100.
You will have 5 NIS profit for each share right? no, because there is a RISK involved. What if the merge won’t go through? That is why the price has not jumped all the way to 100. The price at this moment reflects the risk involved.
In general, arbitrage opportunities are pretty rare in big markets. Pricing of options depends on the no arbitrage principal. What about TASE? are there arbitrage opportunities there? I think in the past there may have been but now with a lot of new investors, it is getting harder to find such opportunities.
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