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Posted by on Apr 2, 2010 in PLAYING WITH MONEY | 0 comments

Inefficiencies in markets present opportunities -Arbitrage!

On the Money From the  April 2, 2010 print edition The R&B singer Billy Preston pined in 1974, “Nothin’ from nothin’ leaves nothin’. You gotta bring me somethin’ if you wanna be with me.” If a person wanted to bring Billy “something,” but had “nothing,” what could they do? Where do any of us turn when we crave “something from nothing”? The answer? Arbitrage. Arbitrage is defined to be the simultaneous purchase and sale of a security (or anything else for that matter) in order to profit from a difference in the price. This usually takes place on separate exchanges or marketplaces. For example, if the price of a stock on the New York Stock Exchange is $10 per share, but is $8 on the Frankfurt exchange, the $2 difference could be an immediate profit requiring zero investment. How it works: The arbitrageur sells on the New York exchange while simultaneously buying on the Frankfurt exchange. Because the transactions theoretically are simultaneous, there’s an immediate gain of $2 per share. Furthermore,...

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Posted by on Feb 1, 2008 in PLAYING WITH MONEY | 0 comments

In short selling, it’s sell high, buy low and maybe anger some

On the Money From the February 1, 2008 print edition There’s an old joke that says, “Want a hot tip? Buy low, sell high.” Of course, that “tip” will only be “hot” if the price is also rising. Recent indicators all around us are signaling a very cool market. Some speculate a recession is near. That usually means falling stock prices. Therefore, the old hot tip of “buy low, sell high” might not come to pass anytime soon. So, how about a new tip? Sell high, buy low. In the dice game of craps, that’s called betting against the dice, or “don’t pass.” In the more scholarly circles of finance, it’s known as the “short sale.” In other words, while everyone else is bemoaning the decline in the price of the stocks they bought low with the hope of selling high, the short seller happily watches the prices fall. But how do you sell something you don’t already own? Here’s an examination of short selling. A short sale is the...

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Posted by on Sep 1, 2006 in PLAYING WITH MONEY | 0 comments

Hedge fund managers can employ numerous strategies

In recent months, the term “hedge fund manager” appeared frequently in the press — usually in combination with the words “fraud,” “conflict of interest” and “crime.” Before you begin to wonder how someone who manages “a fence or boundary formed by a dense row of shrubs or low trees” could commit fraud, let’s examine the definition of “hedge” as it applies to finance. In finance, hedge means making an investment to reduce the risk of adverse price movements in an asset, usually through an offsetting position in a related security. Hedge funds aren’t the same as mutual funds. Hedge funds are far more capricious in their investment options. They can use short selling, leverage, derivatives, put and call options, futures contracts and more. The hedge fund manager creates a far more complex and free-ranging set of financial instruments than mutual funds. Hedge fund strategies attempt to be unaffected by the direction of the bond (debt) or equity (stock) markets — unlike conventional equity or mutual funds, which generally accept...

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Posted by on Apr 1, 2005 in PLAYING WITH MONEY | 0 comments

Arbitrage can be lucrative, but be real careful about timing

On the Money From the April 1, 2005 print edition he R&B singer Billy Preston pined in 1974, “Nothin’ from nothin’ leaves nothin’. You gotta bring me somethin’ if you wanna be with me.” If a person wanted to bring Billy “something,” but had “nothing;” what could they do? Where do any of us turn when we crave “something from nothing?” The answer? Arbitrage! Arbitrage is defined to be the simultaneous purchase and sale of a security (or anything else for that matter) in order to profit from a difference in the price. This usually takes place on separate exchanges or marketplaces. For example, if the price of a stock on the New York Stock Exchange is $10 per share, but on the Frankfurt exchange, $8 per share, the $2 difference could be an immediate profit requiring zero investment. Here’s how it would work. The “Arbitrageur” sells on the New York exchange while simultaneously buying on the Frankfurt exchange. Since the transactions are theoretically simultaneous, there is an immediate...

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Posted by on Mar 4, 2005 in PLAYING WITH MONEY | 0 comments

Derivatives – aka ‘synthetic securities’ – are worth a look

On the Money From the March 4, 2005 print edition Headlines in the financial press often include the word “derivatives,” usually associated with a problem, loss or conflict. But, what are derivatives? How are they used? Why are these securities so often the object of derision? Following is a brief exploration of derivatives, aka synthetic securities. Derivatives began as the combination of an asset with an agreement to buy or sell that asset as a specified price. Thus the term “synthetic security.” The intent was to limit (or transfer) the risk of loss. The transfer of risk is accomplished through the use of option or futures contracts. Due to the number of possible combinations, options and futures contracts can be a bit mystifying and complicated at first. Yet they are nothing more than either a promise to buy or a promise to sell. These promises to buy or sell are linked to everything from specific commodities (orange juice or sugar) to the stock market and money itself. Options and...

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