5 ms·

so by your definition, any leveraged investment is arbitrage.

by klochner 15y ago

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.
        Retric 15y ago
        I don't think we are communicating vary well. "Dollars spent to pay off a loan are worth less than dollars you get at the beginning of the loan." (This is Correct) "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" (up to here everything is fine) "the monetary inflation rate over the time period." (This is literally true, but misses the point while inflation makes this easier not harder if inflation is meaningful your not doing arbitration.) The point I am trying to make is if you have a 0 interest loan for 1 year and you buy a 1 year bond that pays 1% interest then great you have arbitrage. But, if you have that same loan buy a 2 year bond with a that pays 2% it's become speculation because the value of a 2 year bond in at 1 years is dependent on inflation and you either need to sell that bond at market rates or get a new loan. So, if inflation is important your not doing arbitration.
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.

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.
      - Retric 15y ago
        I don't think we are communicating vary well. "Dollars spent to pay off a loan are worth less than dollars you get at the beginning of the loan." (This is Correct) "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" (up to here everything is fine) "the monetary inflation rate over the time period." (This is literally true, but misses the point while inflation makes this easier not harder if inflation is meaningful your not doing arbitration.) The point I am trying to make is if you have a 0 interest loan for 1 year and you buy a 1 year bond that pays 1% interest then great you have arbitrage. But, if you have that same loan buy a 2 year bond with a that pays 2% it's become speculation because the value of a 2 year bond in at 1 years is dependent on inflation and you either need to sell that bond at market rates or get a new loan. So, if inflation is important your not doing arbitration.

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.