Many people have never heard of the word "Arbitrage", but their job or business may depend upon it. The simple definition is, "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. (www.investopedia.com/terms/a/arbitrage.asp#ixzz1jXbMllQM)"
Most trade managers have the belief that "the market" is consistently correcting itself and an efficient market has no arbitrage. In essence, this belief is at the root of economic turmoil. Without arbitrage, innovation cannot occur. Arbitrage finds a way to naturally exist as its own form of correction on a market without innovation.
Suppression of natural arbitrage may have the opposite long-term effect. Synthetic arbitrage, on the other hand, can be a wholly different variable within an alternative strategy that is separate from traditional transactions and underwriting. Synthetics can only be a positive strategy through forward agreements where all parties win.
An issuer, beneficiary, and an investor can establish a synthetic arbitrage strategy, but not without full cooperation by all 3 parties. There must be 3 in the equation, otherwise there is no formula that has a positive impact on the economy and all 3 parties.
Generally, a capitalist equation requires a loss position for a "winner" to exist. Hence the opposing make-up of socialism where everyone wins (theoretically). A benevolent capitalist can accomplish a system far superior to that of socialism. Do you know any benevolent capitalists?
