5 ms·

Maybe I should have been more clear. What you're arbitraging is two rates of return-- the interest rate of the loan, and the return of the investment. In mor

by nirvana 15y ago

Maybe I should have been more clear. What you're arbitraging is two rates of return-- the interest rate of the loan, and the return of the investment. In more conventional arbitrage, you're buying a commodity at one price in one market and selling it at another price in another market at exactly the same time. Here you're doing that, only the commodity is money. (Gold is money.) You could substitute a foreign currency, or foreign bonds for gold in my example, just as easily. In that case, you'd be borrowing US dollars and buying, say, Greek Bonds. I picked that example because greek bonds have a high rate of return. They're also debt... you're getting debt in one market and selling it in another. Greek Bonds obviously have risk. All arbitrage has risks, and those risks can be huge. That the risk is huge doesn't make it any less arbitrage. FWIW, I don't think gold is at a particularly high price. I think the dollar and other currencies, which have been long over valued, are a little less overvalued than they were. I don't price gold in dollars, I price dollars in gold.

klochner 15y ago
so by your definition, any leveraged investment is arbitrage.
- nirvana 15y ago
  I, in fact, did not say that, making this a non-sequitor.
  - Retric 15y ago
    The problem is you assumed it even if you did not say it. The are basically two ways to do arbitrage one is to execute the trades fast enough that the prices are fixed. Or do a closed transaction where the underling commodity price is irrelevant and you make money even if the price spikes or drops. AKA buy a directive of a stock and short that same stock. You can still be bitten if one of the counter-party does not finish the transaction but at least on paper your safe. PS: Get a loan at 0% interest, buy an option on gold at 1000$ and short gold at 1100$. Now most of the time things are priced in such a way that you will lose money on this trade however if people are selling the options to cheaply then you could execute this trade and be guaranteed to make money. Assuming the people that sell you the option don't default. Unfortunately, you can make money by selling options worth more than your capital so you come out ahead on average and if bad things happen you are ridiculously broke but effectively still at zero. Sort of like me making a billion dollar bet that the redskins don't go undefeated this year, it's easy for me to price those risks based on the idea I would only go broke in such a way it they seem really attractive even if they are next to worthless.
    - nirvana 15y ago
      No, in point of fact, I said the opposite. It is a shame that HN has become a place where people don't bother to understand the point someone is making, lie about them, and then the person gets down voted to negative territory when they try to defend themselves. Not a single response to my comment has been on the actual topic of this submission. Most of them have been frankly, dishonest, and the only thing I'm concluding from this is that this site is inhabited by people who are such financial neophytes that they think there's such a thing as a "riskless transaction". So, no, you don't get to assert that I assumed something and then call me a liar when I point out that I didn't say it, especially in the face of me pointing out the difference between leverage investments or margin investments and arbitrage in the original comment, which is proof positive that I didn't say they were the same. Or, well, you can do that, but you force me to conclude that this is not a place where intelligent discussion can take place.
      - Retric 15y ago
        "Dollars spent to pay off a loan are worth less than dollars you get at the beginning of the loan. This means, the asset you put your money into, needs to return not only enough to cover the interests & fees on the credit cards over the time period, but the monetary inflation rate over the time period." Sorry, but on top of confusing leverage and arbitration (AKA arbitration works even if your not taking out a loan but you can use a loan's leverage to increase your return). Your also making the mistake that inflation is bad when you hold another asset. If you buy 1000$ worth of wood and you get significant inflation that wood is going to be worth more dollars not fewer dollars when you sell it. When you get a loan inflation is good and deflation is bad, when you give someone a loan inflation is bad and deflation is good. PS: When you get a loan you are required to pay back X% more than than you borrowed but that percentage is normally independent of the inflation rate for some period of time. It's true that with CC they will adjust their rates based on inflation, but the only reason this could work is the rate is fixed for some period of time even if inflation changes.
        nirvana 15y ago
        You quote me saying the correct thing about inflation, then you provide an example that is consistent with what I said, and then you claim that I am ignorant. All in a thread where I responded to someone who lied about what I said, and pointed out that I didn't say that at all, and in fact, I said the opposite. But what I actually said does not matter to you, or others commenting here. You're dishonest, and a perfect example of why HN sucks for trying to have a worthwhile discussion.
- barrkel 15y ago
  I don't think so. It's about the price of money. If you can buy money for rate a, and sell that money elsewhere for rate b, where a < b, then it's arbitrage on the price of money. (Where price of money is a synonym for interest rate.)
  - nirvana 15y ago
    Exactly. I'm guessing people have trouble seeing money as a commodity that can be arbitraged.
    - feral 15y ago
      Gold is not the same as USD. It is a different asset to USD, and carries different risks. The Greek Bonds you mention, you also consider 'money'. Well, not all 'money' is the same. That's why you get paid more if you buy Greek bonds than if you buy German Bonds, to the same Euro value: risk premium. Its not arbitrage if you are just being paid for taking on risk, by definition.
      - nirvana 15y ago
        I wrote my post, presuming anyone who might follow such a strategy was sophisticated enough to understand what risk is. Risk can be hedged. Risk can also be calculated. You're right that gold is not the same as USD. It is less risky. You'd do well to not tell me what I believe about various asset classes, especially when it is clear you have not even read the original comment I made. By definition, people engaging in arbitrage are being paid to take the risk that the arbitrage might fail. The idea that there is such a thing as a risk-free form of property is fallacious. Thus your arbitrary demand that I be talking about something risk free is an impossible standard (and quite off the point... but then, maybe derailing the possibility of sophisticated financial discussion was your goal?) I mentioned hedging risk, and everything else you've brought up in my original comment.
derobert 15y ago
You're missing the key point of arbitrage: its risk-free. Say you borrow $100k at 0% for 1 year. You then buy (at $1734/oz) ~57oz of gold. Next year, you plan to sell it and pay off your $100k. But you've taken a risk. If gold is only $1500/oz next year, you're going to lose ~$13k. Of course, if its $2000/oz, you're going to make a nice profit. You're speculating on the gold market. You could build a similar position with gold futures, for example. Arbitrage would be if you could take that $100k, and immediate buy gold in USD, sell it in EUR, and then buy USD with those EUR and wind up with >$100k. Then you're not taking any risk, because you can set up all those transactions practically at the same time (and the markets are liquid enough you know the prices you'll be able to buy/sell at).
- 2arrs2ells 15y ago
  While the academic definition of arbitrage requires it to be risk-free, in practice there is always risk of some form. If you're buying gold in SF for $100 and selling it in NYC for $101, you carry the risk that the price will move while you're executing the trade. If you're doing the yen carry trade (borrowing yen, and lending dollars), you carry the currency risk. If you're taking 0% credit card loans and buying CDs, you carry the default risk on the CDs (mitigated, of course, by the FDIC). That said, I agree with your general point - buying gold with a 0% loan carries so much risk that it's really just a leveraged investment, not an arb opp.
- nirvana 15y ago
  You are assuming the person doing this has not also bought puts against the gold sufficient to cover the long position. There is no such thing as "not taking any risk" or a "risk free" investment. The idea that arbitrage is without risk is, kinda amusing, if you think about it. Even buying the put options I described to protect the position involves risk, though it does reduce the level of risk dramatically.
feral 15y ago
I'm afraid you don't understand the point of arbitrage, at all. As others have said, by definition, an arbitrage is risk free (or, in practice, nearly risk free). Buying extremely risky Greek Bonds, with borrowed USD, is just making a leveraged investment. Considering the transaction costs you'll pay, as a small time buyer, and the various worked in charges, you will certainly be losing out, when the risk etc is factored in. Its a bad way to fund your startup; its up there with buying lottery tickets, or playing roulette to make more money: might work out ok, sometimes, or even all the times you try it - but its a negative expectation thing to do.
- nirvana 15y ago
  The problem is you do not understand risk at all. You compare things with many orders of magnitude different risks as if they were equally risky. In fact, in my original post, I addressed the issue of risk, and mentioned hedging that risk using put options. Yet, you think that because you're not sophisticated enough, or didn't bother to actually read my post, you think you can spout off and accuse of saying things I did not say. In fact, you claim that I "don't understand the point of arbitrage, at all", on the basis that you are unable to price risk accurately, or do not understand the concept of hedging. But hey, just keep on thinking that gold is very risky.... sucker.
  - dasil003 15y ago
    You're claiming gold is not risky? You're like the cheap little ads plastered all over the back of magazines trying to sell you gold. If gold is such a sure bet, why are so many people so desperate to sell it to you?
    - nirvana 15y ago
      You put words in my mouth and then you characterize me. This makes you consistent with the rest of the commentators. This is why you can't have good discussion on HN.
      - 15y ago

by nirvana 15y ago

klochner 15y ago

so by your definition, any leveraged investment is arbitrage.

nirvana 15y ago
I, in fact, did not say that, making this a non-sequitor.
- Retric 15y ago
  The problem is you assumed it even if you did not say it. The are basically two ways to do arbitrage one is to execute the trades fast enough that the prices are fixed. Or do a closed transaction where the underling commodity price is irrelevant and you make money even if the price spikes or drops. AKA buy a directive of a stock and short that same stock. You can still be bitten if one of the counter-party does not finish the transaction but at least on paper your safe. PS: Get a loan at 0% interest, buy an option on gold at 1000$ and short gold at 1100$. Now most of the time things are priced in such a way that you will lose money on this trade however if people are selling the options to cheaply then you could execute this trade and be guaranteed to make money. Assuming the people that sell you the option don't default. Unfortunately, you can make money by selling options worth more than your capital so you come out ahead on average and if bad things happen you are ridiculously broke but effectively still at zero. Sort of like me making a billion dollar bet that the redskins don't go undefeated this year, it's easy for me to price those risks based on the idea I would only go broke in such a way it they seem really attractive even if they are next to worthless.
  - nirvana 15y ago
    No, in point of fact, I said the opposite. It is a shame that HN has become a place where people don't bother to understand the point someone is making, lie about them, and then the person gets down voted to negative territory when they try to defend themselves. Not a single response to my comment has been on the actual topic of this submission. Most of them have been frankly, dishonest, and the only thing I'm concluding from this is that this site is inhabited by people who are such financial neophytes that they think there's such a thing as a "riskless transaction". So, no, you don't get to assert that I assumed something and then call me a liar when I point out that I didn't say it, especially in the face of me pointing out the difference between leverage investments or margin investments and arbitrage in the original comment, which is proof positive that I didn't say they were the same. Or, well, you can do that, but you force me to conclude that this is not a place where intelligent discussion can take place.
    - Retric 15y ago
      "Dollars spent to pay off a loan are worth less than dollars you get at the beginning of the loan. This means, the asset you put your money into, needs to return not only enough to cover the interests & fees on the credit cards over the time period, but the monetary inflation rate over the time period." Sorry, but on top of confusing leverage and arbitration (AKA arbitration works even if your not taking out a loan but you can use a loan's leverage to increase your return). Your also making the mistake that inflation is bad when you hold another asset. If you buy 1000$ worth of wood and you get significant inflation that wood is going to be worth more dollars not fewer dollars when you sell it. When you get a loan inflation is good and deflation is bad, when you give someone a loan inflation is bad and deflation is good. PS: When you get a loan you are required to pay back X% more than than you borrowed but that percentage is normally independent of the inflation rate for some period of time. It's true that with CC they will adjust their rates based on inflation, but the only reason this could work is the rate is fixed for some period of time even if inflation changes.
      - nirvana 15y ago
        You quote me saying the correct thing about inflation, then you provide an example that is consistent with what I said, and then you claim that I am ignorant. All in a thread where I responded to someone who lied about what I said, and pointed out that I didn't say that at all, and in fact, I said the opposite. But what I actually said does not matter to you, or others commenting here. You're dishonest, and a perfect example of why HN sucks for trying to have a worthwhile discussion.
barrkel 15y ago
I don't think so. It's about the price of money. If you can buy money for rate a, and sell that money elsewhere for rate b, where a < b, then it's arbitrage on the price of money. (Where price of money is a synonym for interest rate.)
- nirvana 15y ago
  Exactly. I'm guessing people have trouble seeing money as a commodity that can be arbitraged.
  - feral 15y ago
    Gold is not the same as USD. It is a different asset to USD, and carries different risks. The Greek Bonds you mention, you also consider 'money'. Well, not all 'money' is the same. That's why you get paid more if you buy Greek bonds than if you buy German Bonds, to the same Euro value: risk premium. Its not arbitrage if you are just being paid for taking on risk, by definition.
    - nirvana 15y ago
      I wrote my post, presuming anyone who might follow such a strategy was sophisticated enough to understand what risk is. Risk can be hedged. Risk can also be calculated. You're right that gold is not the same as USD. It is less risky. You'd do well to not tell me what I believe about various asset classes, especially when it is clear you have not even read the original comment I made. By definition, people engaging in arbitrage are being paid to take the risk that the arbitrage might fail. The idea that there is such a thing as a risk-free form of property is fallacious. Thus your arbitrary demand that I be talking about something risk free is an impossible standard (and quite off the point... but then, maybe derailing the possibility of sophisticated financial discussion was your goal?) I mentioned hedging risk, and everything else you've brought up in my original comment.

derobert 15y ago

You're missing the key point of arbitrage: its risk-free. Say you borrow $100k at 0% for 1 year. You then buy (at $1734/oz) ~57oz of gold. Next year, you plan to sell it and pay off your $100k. But you've taken a risk. If gold is only $1500/oz next year, you're going to lose ~$13k. Of course, if its $2000/oz, you're going to make a nice profit. You're speculating on the gold market. You could build a similar position with gold futures, for example. Arbitrage would be if you could take that $100k, and immediate buy gold in USD, sell it in EUR, and then buy USD with those EUR and wind up with >$100k. Then you're not taking any risk, because you can set up all those transactions practically at the same time (and the markets are liquid enough you know the prices you'll be able to buy/sell at).

2arrs2ells 15y ago
While the academic definition of arbitrage requires it to be risk-free, in practice there is always risk of some form. If you're buying gold in SF for $100 and selling it in NYC for $101, you carry the risk that the price will move while you're executing the trade. If you're doing the yen carry trade (borrowing yen, and lending dollars), you carry the currency risk. If you're taking 0% credit card loans and buying CDs, you carry the default risk on the CDs (mitigated, of course, by the FDIC). That said, I agree with your general point - buying gold with a 0% loan carries so much risk that it's really just a leveraged investment, not an arb opp.
nirvana 15y ago
You are assuming the person doing this has not also bought puts against the gold sufficient to cover the long position. There is no such thing as "not taking any risk" or a "risk free" investment. The idea that arbitrage is without risk is, kinda amusing, if you think about it. Even buying the put options I described to protect the position involves risk, though it does reduce the level of risk dramatically.

feral 15y ago

I'm afraid you don't understand the point of arbitrage, at all. As others have said, by definition, an arbitrage is risk free (or, in practice, nearly risk free). Buying extremely risky Greek Bonds, with borrowed USD, is just making a leveraged investment. Considering the transaction costs you'll pay, as a small time buyer, and the various worked in charges, you will certainly be losing out, when the risk etc is factored in. Its a bad way to fund your startup; its up there with buying lottery tickets, or playing roulette to make more money: might work out ok, sometimes, or even all the times you try it - but its a negative expectation thing to do.

nirvana 15y ago
The problem is you do not understand risk at all. You compare things with many orders of magnitude different risks as if they were equally risky. In fact, in my original post, I addressed the issue of risk, and mentioned hedging that risk using put options. Yet, you think that because you're not sophisticated enough, or didn't bother to actually read my post, you think you can spout off and accuse of saying things I did not say. In fact, you claim that I "don't understand the point of arbitrage, at all", on the basis that you are unable to price risk accurately, or do not understand the concept of hedging. But hey, just keep on thinking that gold is very risky.... sucker.
- dasil003 15y ago
  You're claiming gold is not risky? You're like the cheap little ads plastered all over the back of magazines trying to sell you gold. If gold is such a sure bet, why are so many people so desperate to sell it to you?
  - nirvana 15y ago
    You put words in my mouth and then you characterize me. This makes you consistent with the rest of the commentators. This is why you can't have good discussion on HN.
    - 15y ago