But such schemes create opportunities for grey-market arbitrage: the illicit export of drugs from poorer countries to richer ones where their price is higher.
So there would be a kind of arbitrage opportunity.
But it became clear that there were limits to their ability to arbitrage folly away.
A new programme to link the markets was supposed to prevent such gaps, allowing investors to arbitrage the price differences.
Today, convertible bonds exist mainly as arbitrage opportunities unprofitable ones, for the moment for hedge funds, who own more than 80% of the $290 billion market.Instead, that investor has a new, equity-like instrument in the shape of credit-default swaps, which permit him to insure against the risk of corporate default in a liquid market now worth more than $5 trillion.
But that wholesalers' prices are quicker to adjust to exchange-rate imbalances does not explain why they exist at all: why does arbitrage not lead importers to eradicate the disparities altogether?As the authors admit, other factors must come into play, such as the ability of monopolistic suppliers to discriminate between markets in their pricing policy.
It is not, however, possible to know when they will crash as, if this could be done, arbitrage would ensure that markets never became misvalued.
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"Exchanges aren't geographic concepts any more, they're legal concepts," says Benn Steil, an exchange expert at the Council on Foreign Relations in New York.Regulatory arbitrage between exchanges has occurred since at least the 1990s, Mr Steil notes, when the CFTC allowed Deutsche Terminbörse (a precursor of Eurex, a German-Swiss derivatives exchange) to put electronic trading terminals in America.
But he made arguably the single most influential decision of his long career in 1983, when as head of risk arbitrage at Goldman he went to the MIT Sloan School of Management in Cambridge, Massachusetts, to hire an economist called Fischer Black.A decade earlier Myron Scholes, Robert Merton and Black had explained how to use share prices to calculate the value of derivatives.
The restrictions on short-selling (betting on falling prices) imposed by regulators round the globe have played havoc with managers' strategies in recent weeks.Take the worst-performing strategy, convertible arbitrage, which lost the average fund 12% in the month.
