^^^^ again, exactly. Let’s illustrate with super simple theoretical textbook example that I adapted from a Schweser book: - Imagine the risk free rate in Europe is 5.127%, in USA 5.6% - Imagine the Spot Euro/ 0.96 and 1 year Forward is 0.95661 Theoretically, an arbitrage exists : You borrow 1 € at 5.127 %, convert to at Spot and enter in Forward for delivery in 1 year, invest at 5.6%, convert back using your forward in 1 Year. You now have 1.05227 € You pay back your debt at risk free rate of 1+5.127% and you are left with 0.001 € of profit per € borrowed. All the variables were locked in at inception and it’s risk free. This is what I call textbook arbitrage. In the real world, however, I would expect that a retail investor would be faced with the following problems, just to name the most obvious: - Inability to borrow at 5.127%: Let’s say you short 0 coupon Gov debt currently yielding 5.127% your brokerage fees will make your effective borrowing costs more than 5.127. Plus as a retail investor you will have to post margin for a short sale, killing your arbitrage right there. - Inability to convert at Spot because you’ll get shitty spreads from your retail FX broker, same goes for the the Forward contract @ 0.95661. Can you eaven enter in Forward contracts as a retail guy ? - Inability to lend at 5.6% because of brokerage costs again. - How do you even spot and act upon opportunities like that without trading desks of banks and HFs having acted upon it by the time you even get the quote on your computer screen, let alone make a few clicks. I don’t know. I’m sure it’s impossible. Can anyone say otherwise ?
joemontana Wrote: ------------------------------------------------------- > Spierce – > > > You think CDSs should be banned but you pursue > merger arb? Merger arb is speculation. CDSs are > often used for hedging long bond positions I think you have the wrong [S/C]pierce dude.
Yes it’s possible! see this. “Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs” http://faculty.chicagobooth.edu/john.cochrane/teaching/Empirical_Asset_Pricing/lamont%20and%20thaler%20add%20and%20subtract%20jpe.pdf the best trade I ever made was - I think - April 2006 when it was announced that GOOG would be added to the S&P500. That’s an almost guaranteed profit because the stock added to the index is almost assured to rise with all the buying of index replicators etc! I bought a call around 470, I think, the day of the announcement. I sold it a few days later at 485 because I got nervous reading how Sergei Brin et al were going to sell massive amounts of their shares. I made $1,500 but if i’d only held on a little longer, could have made $15,000! dmn it.
c/s pirce: sorry dude. Are you related to the other pierce? Double Dip: That was a good trade but it was certainly not arbitrage.
negative, though we were on the same test together
joemontana Wrote: ------------------------------------------------------- > Spierce – > > > You think CDSs should be banned but you pursue > merger arb? Merger arb is speculation. CDSs are > often used for hedging long bond positions Not the same person, but funny nonetheless.
So, anyone ever made “pure arbitrage” on an individual level ?