Say I want to do arbitrage between Exchange A and Exchange B on USD/AAPL. This requires that I hold equal parts USD and AAPL. I don't want exposure to the movement in AAPL. How do I hedge my AAPL inventory so that I remain market neutral?

  • 1
    $\begingroup$ Where exactly do you think you see arbitrage? Usually, (exploiting) arbitrage means one engages in the simultaneous purchase and sale of the same asset in different markets - hence, no exposure to movements. $\endgroup$
    – AKdemy
    Aug 17 at 21:02
  • $\begingroup$ Perhaps I should have been more clear. I was talking about delta hedging arbitrage. Exchange A is at 500.00 USD and Exchange B is at 550 USD. You sell AAPL on Exchange B and buy AAPL on exchange A. When the spread eventually converges again, you do the inverse of both trades. $\endgroup$ Aug 17 at 21:43

Too long for a comment - so I add this here as an answer. Not sure what delta hedging arbitrage is but I think you define delta as a difference in price?

While cross listing is not uncommon, I think AAPL is actually Nasdaq only as opposed to say IBM which is cross-listed. This is verified by Reuters when looking at IBM vs Apple

If you ever were to see arbitrage (not talking about a price difference of 500 vs 550), it will be extremely short lived (so no need to worry about inventory). There are market makers in the stock exchanges that make sure that buy and sell orders get filled quickly (at market prices). They ensure liquidity and make money on the spread, the difference between ask and bid. This may not be true in pre and after market hours but even there you will either have voluntary participation of a market maker or ECN or other big players (hedge funds, HFT firms etc) who constantly monitor prices.

If you hold something and have to wait for the price to converge, this is not arbitrage. Arbitrage is defined as the possibility of a risk-free profit after transaction costs (risk free implies instantaneous).

For example, if you have dual listings, this is not arbitrage. Many people call it like that, but it does not satisfy the definition of arbitrage. The most famous example in my opinion being Royal Dutch Shell in the early 1980s, where Royal Dutch was trading at a discount of approximately 30% relative to Shell. Although these dual listed companies (Royal Dutch Shell) function as a single operating business, and as such shares represent claims on the very same underlying cash flows, divergence can be substantial and convergence can take many years. If you do not want exposure and hedge this, you have no way to benefit from price moves (convergence).


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.