non-covering arbitrage

Non-Arbitrage

Non-arbitrage is an investment strategy used to make a return on a portfolio of assets that does not involve the purchase and sales of derivatives or other similar financial instruments. This strategy can be seen as an alternative to more traditional strategies that involve the use of derivatives in an attempt to increase return. Non-arbitrage uses only the purchase and sale of stocks and bonds in order to generate returns.

Non-arbitrage strategies are based upon the fundamental analysis of a portfolio of assets. This analysis typically involves looking at the fundamental characteristics of the portfolio, such as the underlying companies and industries, along with macroeconomic factors such as interest rates and currency movements. The aim of this analysis is to identify attractive stocks or bonds which have a potential to generate attractive returns. Once these stocks and bonds are identified, the investor will then allocate capital to them.

Non-arbitrage strategies typically involve investing for long term capital appreciation and income. This means that the investor will look to buy assets which will appreciate in value over time and provide a dividend or interest payment to the investor. For example, an investor may purchase stocks in a company where the company is expected to grow its earnings and dividends over time, thus providing an attractive return.

In addition to capital appreciation and income, non-arbitrage also looks to generate an additional return through short or medium term investments. An investor may look to identify stocks or bonds which have a potential to generate a short term return. This return could come through the trading of stock options, or through the purchase of a bond with a floating rate coupon.

Non-arbitrage strategies typically require a greater degree of skill and experience than traditional derivative trading strategies and can be harder to master. Due to the greater potential for reward and risk, non-arbitrage strategies should only be attempted by more experienced investors. It is also important to note that due to the complexity of the strategies involved, significant risk can be involved, and investors should be aware of this before investing.

Overall, non-arbitrage strategies offer an alternative to traditional arbitrage strategies, and can allow an investor to generate attractive returns from the purchase and sale of stocks and bonds. The ability to generate an additional return through short and medium term investments can further increase the potential return, however there is a greater degree of risk involved, and investors should understand this before attempting to use non-arbitrage strategies.

Non-arbitrage involves profiting from investment within the securities, commodities and derivatives markets. This can be done through various methods, such as market making, in which an investor tries to profit from the price spread (difference between buy and sell prices) between two markets for the same asset. Other methods include trading securities to capitalize on patterns or technical indicators, or through taking advantage of mis-priced assets.

Non-arbitrage strategies require assumptions about the future, such as the direction of underlying trends. For example, a momentum trader might look to capitalize on assets that have recently moved in a certain direction, while value investors might seek assets they believe have deviated excessively from their underlying value. By entering a position, a trader hopes to take advantage of the trend and close the position later to earn a profit when the trend reverses.

Non-arbitrage strategies also often involve higher degrees of risk, as investors are assuming price movements in the direction predicted by their outlook. When market conditions do not move as projected, the trader can suffer losses. As such, traders need to be able to limit their exposure to risk through using stop loss orders or other methods, while they simultaneously should seek to maximize potential profits.

Even where non-arbitrage trades fail to generate returns, they still have the potential to be profitable. Many traders capitalize on non-arbitrage strategies in order to diversify their portfolios, since they are often not as dependent on changes in market liquidity. Non-arbitrage trades can also be used as a hedging strategy, with investors taking positions in assets that offset losses in their existing portfolios.

Non-arbitrage strategies therefore can be used to increase the returns from a portfolio and reduce exposure to risk. While these strategies are complex, and investing in this fashion involves considerable risk, experienced investors can take advantage of opportunities in the markets to generate profits from the price spreads and trend movements that occur.