Legal Definitions - arbitration of exchange

Arbitration of exchange is when someone buys and sells bills of exchange in different international markets at the same time. They do this in the hope of making a profit from the difference in currency prices in those markets. This is also known as arbitrage.

Let's say that the exchange rate between the US dollar and the British pound is $1.30 to £1 in New York, but in London, it's $1.35 to £1. An arbitrager could buy £1,000 in New York for $1,300 and then sell it in London for $1,350, making a profit of $50.

Another example would be if the exchange rate between the euro and the Japanese yen is €1 to ¥120 in Frankfurt, but in Tokyo, it's €1 to ¥125. An arbitrager could buy €1,000 in Frankfurt for ¥120,000 and then sell it in Tokyo for ¥125,000, making a profit of ¥5,000.

These examples illustrate how an arbitrager can take advantage of the difference in currency prices between different markets to make a profit.