Arbitrage
Arbitrage is the situation in which you perform a series of transactions and end up
with more money than you started with. It is typically applied to markets where commodities are
traded. We will consider the currency market.
Consider the following set of exchange rates.
| | Dollars | Pounds | Euro | Yen
| | Dollars | | 1/5 | 2 | 4 |
| Pounds | 2 | | 5 | 8 |
| Euro | 1/2 | 1/5 | | 2 |
| Yen | 1/4 | 1/8 | 1/2 | |
Is there an arbitrage opportunity?