Arbitrage describes the art of buying a security/asset/commodity in a market, platform, exchange, or location at a lower price and selling it at a higher price in another market or location, thereby enabling investors/traders to profit from the difference in the value or cost of the underlying asset.
For instance (in terms of cross-border payments), let’s say an Alpha User at LINK initiates a transfer of ₦52,700 in total amount to the UK from Nigeria at ₦527= £1 (Mid-market rate), then later goes to a different remittance network: let’s say “Transfer Go”, sends this money back at £1=₦1000 (Parallel market rate): totaling ₦100000 in the amount received; he has made ₦47,300 in value 🤯- Crazy Right….
Arbitrage exists because of market inefficiencies and it allows arbitrators to take advantage of price gaps in the market. In a case study like Nigeria, which operates a two-tiered FX system (Bank rate and Parallel market rate) caused by low FX liquidity and rigid bank processes, local communities are forced to venture into other channels of getting foreign currencies because of the rising demand for trade, tourism, and overseas Education. This creates opportunities for other economic agents to take advantage of foreign currency Price differences, coupled with other financial service providers that aid the delivery of these processes. Although in other existing financial markets, arbitrage opportunities may exist for a shorter period due to the automated market mechanism (powered by advanced tech) that has been put in place to curb these excesses.
In order to mitigate arbitrage risk for cross-border payment services, we at LINK have developed a pricing strategy called “Mid-Point rate”: You can look up the article here.
In a nutshell, arbitrage has its positives and negatives: depending on what role you choose to play, and to consciously keep a check on this, there are governing authorities that have been put in place, nevertheless, We do have a role to play individually: even as we play collectively.
#LINK #LINKIO #ARBITRAGE
