Currency arbitrage

Arbitrage is something you will hear mentioned a lot in FX circles. However, for the small retail investor, it is usually something that is talked about a lot more than it is actually practically taken advantage of. Mostly, it happens at the big end, and when it does it is extremely swift and often very profitable.

Let’s have a look at an example.

Assume you are a dealer quoting USD/JPY in the currency market and your current price is 85.00/10. This means you buy US dollars at 85.00 and are willing to sell dollars (for yen) at 85.10. You notice one of your competitors is quoting 85.03/13; that is, they are willing to bid (or buy) at 85.03 and willing to offer (sell) at 85.13.

Now let’s further assume that you are worried that the USD may fall. To avoid people selling to you (you buying at 85.00), you lower your price to, say, 84.85/95. Now look what happens.