Sun | Apr 19, 2015

Arbitrage: Caribbean anomalies or opportunities?

Published:Wednesday | April 13, 2011


In the strictest sense, arbitrage refers to the simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.

Arbitrage exists as a result of market inefficiencies. It provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. Given the advancement in tech-nology, it has become extremely difficult to profit from mispricing in the market. Many traders have computerised trading systems set to monitor fluctuations in similar financial instruments. Any in-efficient pricing set-ups are usually acted upon quickly and the opportunity is often eliminated in a matter of seconds.

For example, Guardian Holdings Limited is listed on both the Jamaica and Trinidad and Tobago stock exchanges. On Friday, April 8, Guardian shares closed at J$160 per share on the JSE, or around US$1.83 per share, given an average exchange rate of around J$85.86 per US dollar. On the same date, Guardian shares closed at TT$15 on the TTSE or around US$2.34 per share, given an exchange rate of TT$6.41 to the US dollar. An arbitrage oppor-tuinity would appear to exist to purchase Guardian shares in Jamaica and sell them in Trinidad. How and why these anomalies appear to exist and persist is another whole story.

justin.robinson@cavehill.uwi.edu