12 August 2011

Arbitrage - another way of arbitraging

For my understanding, arbitrage is a way to make a profit by exchanging two or three different asset classes or investment products without risk. The risk-free arbitrage for me is to make a decent profit from a market without a worry.

Let me give you example-
Says you are now want to purchase the mother shares of 2.10 dollars. But you are given a chance to purchase a warrant with price at 1.00 and you can convert to it three years later with the price of 1.00 dollar and the total cost for you to convert is 2.00 dollar. So now, you can sell the mother shares and buy the warrant. By keep continue to doing so, you will be able to get an arbitrage profit from here.

Another way of sell high buy low is to sell the shares at higher price when the market is going down and purchase it back at Lower price later. Nonetheless it is a bit like a gambling as we couldn't tell how the direction is going to be.

So my conclusion is: there are plenty ways of arbitrage from the market, depends on how creative you are.


  1. Hi Jack Phang,

    Nice blog. Am from investalks. I learned a lot of interesting things here.

    From your example, I think it is not correct, as this is not the real "arbitrage" (meaning you are not sure to gain money).

    If the warrant can be converted right away, then I agree this is an arbitrage opportunity. Else, if we have to wait 3 years for the warrant conversion, then it is not a sure gain.

    This is because if the share declares dividend, the share price will get adjusted, but the warrant conversion price is not adjusted.

    So, by holding warrant, you do not entitle for dividend, and also may not be able to convert later in case the company declares big and fat dividend (as the price get adjusted).

    Not sure if I am right.

    1. Ya, that's why I said it's another way of arbitrage. For example, if mother shares is now 4.00, but warrant is 30c and conversion is 3.50. If you have mother shares now, it's better you can buy warrant and convert it at 3.50 immediately. This is what I did for Mah Sing Warrant Buying + Conversion + Mah Sing Mother Shares Selling last time.


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