Optional arbitrage in the Forex market

What is arbitration? Arbitration – the simultaneous buying and selling of identical financial instruments using the differences between the prices of different brokers, exchanges, clearing firms, etc. for profit. In theory, arbitrage is a risk-free strategy. However, in the real world it is associated with greater risk.

So why do you need to engage in arbitration? If you know how to manage risk, arbitration can be very lucrative for you if you are able to find the opportunities and take advantage of opportunities that emerge every day, before they disappear. Eventually, an arbitrage opportunity is present because one side is slow to respond to market news, momentum, etc. When it is corrected, the opportunity will be lost.

Why do optional arbitration? If you are looking for is good enough, you’ll find the opportunity. Forex is a market of interbank / interdealer currency exchange. Simply put, this means that foreign currency is exchanged directly between banks, foreign currency dealers and forex investors wishing either to diversify or to speculate or hedzhirovat foreign exchange risks. The Forex market is not a market in the traditional sense of the word, as it has no centralized location for trading activity and, therefore, the transaction is committed on the Forex exchange. Forex trading takes place through the Internet, by phone at thousands of locations worldwide. Therefore, the Forex market is not as effective as, for example, the New York Stock Exchange. Price differences occur between trading platforms, clearing firms and banks in a short time. Prices for options are also subject to this effect, but since the options for setting prices and other factors are involved, they tend to persist for longer periods of time.

One of the most common causes of option pricing differences is the calculation of volatility. Volatility – the standard deviation measured over a certain period of time. Sounds pretty simple, does not it? Of course, if we compare the performance of different vendors volatility of forex options, you are likely to reveal a difference of 2%. If you find the difference, you’ll probably find an opportunity for arbitrage.

Now that you have found an opportunity for arbitrage, how will you implement it? Of course, it’s a little more complicated, and this article can not cover all possible risks associated with the transaction, but I would like to list some of the factors that should be considered.

Firstly, whether the options are really identical? Do the size of their contracts, expiration dates and deadlines? European or American style?

You should also take into account the implementation risks. Will slippage. Will completing the delay? Does the market is changing too fast?

Exit strategy, how are you going to get out of the deal and make a profit? What happens if the implementation of the option will cease to be viable? Or a situation arises in which the ratio of the strike price and the market price of the option to make a bad execution?

These are just a few of the questions you should consider when working with the optional arbitration. The secret of success option of arbitration, as well as any other kind of trade – planning and risk management. Plan your trade, monitor risks, to execute your plan and achieve success.


Deals with Financial market for 15 years, now in risk management and Asset Trading.

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