International arbitrage involves exploiting price differences between goods and securities in different countries through simultaneous buying and selling. It is viewed as a low-risk investment, but requires quick communication and timing. Market imbalances are short-lived and can be affected by the investor’s actions.
International arbitrage revolves around exploiting price differences between goods and securities in different countries. While this is a common practice among many types of investors, arbitrage separates because the buying and selling occur almost simultaneously. When the broker buys an item in one market, he sells the same item in a different market. International arbitrage is widely viewed as a little to no risk investment, as the initial purchase does not occur unless profit is available at that time.
This method of investing is based on multiple markets in very different locations. Even though most investment markets are linked together by computer, this does not prevent small discrepancies from occurring in the system. High-turnover assets, such as cash investments, will often have small increases in one area, but not others. This increase will translate through the system, but will often create a small bubble in the original market. This bubble will cause the asset to have a higher or lower value than elsewhere.
International arbitrage follows a fairly straightforward process, but what it lacks in complexity it makes up for in timing. In a typical arbitrage situation, the investor is tracking an asset across multiple markets. When they see that a specific security, commodity, or monetary bond is selling at a different rate in a market, they buy it at a lower price. The investor then goes to the market in which he is selling higher and sells it. The difference in the two markets is pure profit.
Since international arbitrage is based on buying and selling almost simultaneously, this process has increased as computers and technology allow for instantaneous communication. When an investor sees market imbalance, he must act immediately before it closes. This requires near instantaneous buying and selling, which was impossible before communication systems went global.
While international arbitrage seems like a foolproof type of investment, there is a small element of risk. The whole system is all about the speed of communication between the buyer and the seller. If any part of the communication chain falters or is late, the seller may not capitalize on the correct price. Since market imbalances are often short-lived, even a few seconds could interrupt the sale.
This is compounded by the effect the investor has on their market. When the investor buys the lower value asset, it automatically starts to increase the price of the purchased asset. This alteration starts moving through the system, changing prices as the investor tries to sell. To control the sale of the asset, the investor must keep pace with his influence.
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