Question

1. Historically the gap in information has been one of the biggest advantages that players in the market have been able to take advantage of. With the Information channels that are available now, near real time information is available. Why is there still room in the market for players to be successful in the International financial markets?

2. How does arbitrage mitigate exposure?

Answer 1

1. Financial innovation has played a role in promoting this unexpectedly good economic performance of the market players.The development of new risk transfer markets—that is, derivative securities—has helped to spread risk more broadly and with more accuracy.financial innovation and globalization also bring challenges with them.They are concern over some well-founded, and others less so that financial stability and transparency may be jeopardized.

Information regarding globalization and innovation have brought great benefits to the global economy and should not be treated as forces to be feared. However, old ways of understanding the linkages between the global economy and financial markets are becoming rapidly outmoded. This requires adaptation to a new environment.

2. Arbitrage is a trading strategy which involves the purchase and resale of an asset to exploit short-term price differences between markets in order to make a profit.

The simplest form of arbitrage exists when same equity is trading at different prices in two different markets. This simple price arbitrage occurs due to inefficiencies in the market place, usually caused by aberrations in demand and supply in one market and should ideally entail no risk, if executed simultaneously in both markets. Such arbitrage opportunities reflect minor pricing discrepancies between markets or related instruments. Per-transaction profits tend to be small, and they can be consumed entirely by transaction costs. Accordingly, most arbitrage is performed by institutions which have very low transaction costs and can make up for small profit margins by doing a large volume of transactions.

Arbitrage funds are safe, and carry very low risk. The fund manager creates a market neutral position by buying in cash market and selling in futures. Market volatility doesn't entail more risk for the investor in such funds.