Enter the amount of security or asset being traded, the exchange rates in the first and second markets, and the cost of the transaction into the calculator to determine the arbitrage profit.
Arbitrage Profit Formula
The following formula is used to calculate the arbitrage profit.
AP = S * (E2 / E1) - C
Variables:
- AP is the arbitrage profit
- S is the amount of security or asset being traded
- E1 is the exchange rate in the first market
- E2 is the exchange rate in the second market
- C is the cost of the transaction
To calculate the arbitrage profit, multiply the amount of security or asset being traded by the ratio of the exchange rate in the second market to the exchange rate in the first market. Then,
subtract the cost of the transaction from this result.
What is Arbitrage Profit?
Arbitrage profit is a risk-free profit that results from exploiting differences in price for the same asset or similar financial instruments in different markets or in different forms. This involves buying an asset at a lower price in one market and simultaneously selling it at a higher price in another market, thereby making a profit from the price discrepancy. The practice of arbitrage helps to maintain price efficiency across different markets.
How to Calculate Arbitrage Profit?
The following steps outline how to calculate the Arbitrage Profit.
- First, determine the initial investment or principal amount (S).
- Next, determine the exchange rate at the start of the arbitrage opportunity (E1).
- Next, determine the exchange rate at the end of the arbitrage opportunity (E2).
- Next, determine the transaction cost (C).
- Finally, calculate the Arbitrage Profit using the formula: AP = S * (E2 / E1) – C.
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem:
Use the following variables as an example problem to test your knowledge.
Initial investment (S) = $5000
Exchange rate at the start (E1) = 1.2
Exchange rate at the end (E2) = 1.5
Transaction cost (C) = $100
