Problem Definition
The simultaneous purchase and sale of the same securities, commodities, or foreign exchange in order to profit from a differential in the price. This usually takes place on different exchanges or marketplaces. Also known as a “Riskless profit ”.
Arbitrage is, arguably, the most fundamental concept in finance. It is a state of the variables of financial instruments such that a riskless profit can be made, which is generally believed not in existence. The economist's argument for its non‐existence is that active investment agents will exploit any arbitrage opportunity in a financial market and thus will deplete it as soon as it may arise. Naturally, the speed at which such an arbitrage opportunity can be located and be taken advantage of is important for the profit‐seeking investigators, which falls in the realm of analysis of algorithms and computational complexity.
The identification of arbitrage states is, at frictionless foreign exchange market (a theoretical...
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Recommended Reading
Abeysekera, S.P., Turtle H.J.: Long-run relations in exchange markets: a test of covered interest parity. J. Financial Res. 18(4), 431–447 (1995)
Ausiello, G., Crescenzi, P., Gambosi, G., Kann, V., Marchetti‐Spaccamela, A., Protasi, M.: Complexity and approximation: combinatorial optimization problems and their approximability properties. Springer, Berlin (1999)
Cai, M., Deng, X.: Approximation and computation of arbitrage in frictional foreign exchange market. Electron. Notes Theor. Comput. Sci. 78, 1–10(2003)
Clinton, K.: Transactions costs and covered interest arbitrage: theory and evidence. J. Politcal Econ. 96(2), 358–370 (1988)
Deng, X., Li, Z.F., Wang, S.: Computational complexity of arbitrage in frictional security market. Int. J. Found. Comput. Sci. 13(5), 681–684 (2002)
Deng, X., Papadimitriou, C.: On the complexity of cooperative game solution concepts. Math. Oper. Res. 19(2), 257–266 (1994)
Deng, X., Papadimitriou, C., Safra, S.: On the complexity of price equilibria. J. Comput. System Sci. 67(2), 311–324 (2003)
Garey, M.R., Johnson, D.S.: Computers and intractability: a guide of the theory of NP‑completeness. Freeman, San Francisco (1979)
Jones, C.K.: A network model for foreign exchange arbitrage, hedging and speculation. Int. J. Theor. Appl. Finance 4(6), 837–852 (2001)
Lenstra Jr., H.W.: Integer programming with a fixed number of variables. Math. Oper. Res. 8(4), 538–548 (1983)
Mavrides, M.: Triangular arbitrage in the foreign exchange market – inefficiencies, technology and investment opportunities. Quorum Books, London (1992)
Megiddo, N.: Computational complexity and the game theory approach to cost allocation for a tree. Math. Oper. Res. 3, 189–196 (1978)
Mundell, R.A.: Currency areas, exchange rate systems, and international monetary reform, paper delivered at Universidad del CEMA, Buenos Aires, Argentina. http://www.robertmundell.net/pdf/Currency (2000). Accessed 17 Apr 2000
Mundell, R.A.: Gold Would Serve into the 21st Century. Wall Street Journal, 30 September 1981, pp. 33
Zhang, S., Xu, C., Deng, X.: Dynamic arbitrage-free asset pricing with proportional transaction costs. Math. Finance 12(1), 89–97 (2002)
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2008 Springer-Verlag
About this entry
Cite this entry
Cai, Mc., Deng, X. (2008). Arbitrage in Frictional Foreign Exchange Market. In: Kao, MY. (eds) Encyclopedia of Algorithms. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-30162-4_33
Download citation
DOI: https://doi.org/10.1007/978-0-387-30162-4_33
Publisher Name: Springer, Boston, MA
Print ISBN: 978-0-387-30770-1
Online ISBN: 978-0-387-30162-4
eBook Packages: Computer ScienceReference Module Computer Science and Engineering