Wednesday, May 17, 2006

Arbitrage! Arbitrage!

In b-school, we were taught that the chances of an arbitrage opportunity to present itself would be one in a million, and that it would last for a fraction of a second as the market would grab the opportunity, and the market forces would bring back a status quo.

What is an arbitrage? Say the price of apples in Kuwait is 10 dirhams per kg, and in UAE it is 20 dirhams per kg. Assuming there is no transportation cost, a smart guy would discover that he can buy apples cheap in Kuwait, only to sell them for a 100% profit in UAE.

Cool eh!

It is really foolish of all the ME countries to refuse revaluing their currency. It has presented an amazing arbitrage opportunity, where investors can buy dollars from Kuwait, and sell them across the ME.
(watch out Gulf News for the above statement in a couple of days hopefully)

The cost of such transactions is low for banks and exchanges operating globally online.


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