5 ms·

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

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.

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.