I noticed a while ago spread betting companies let you buy and sell currency pairs and many of them allow you to select which currency you want to use for each pip value. For example if you open a long position in GBP/USD pip values with a normal broker would be in USD. With many spread betting firms you can have pips in GBP.
Assuming I am fully understanding everything, this theoretically creates a 'risk free' arbitrage opportunity.
Let me explain:
Say at this point in time, GBP/USD is $2.
If you sold 100k GBP/USD with a normal broker and bought GBP/USD with a spread betting company for £5 per pip, no matter which way the market moved, you would have profited.
If price moves to 1.85 in the next few months, the short GBP/USD position with the normal broker would be +$15000 [(2-1.85)*100,000]. The long spread betting position would be £-7500 [15*5].
If we look at both positions in Pound terms we have this:
GBP/USD long £-75.00.
GBP/USD short $15000/1.85 (the rate at the time) = +£81.08.
This would result in a profit of £6.08.
Now let's see what happens if price moved to 2.15 instead:
The long would be +£7500 [15*5].
The short would be -$15000 [(2.15-2)*100,000].
Let's convert both positions into Pounds:
We have +£75.00 and -$15000/2.15= £69.76.
This would result in a profit of £5.24.
So as you can see, no matter which direction the forex pair goes, you stand to gain. These calculations do not factor in the spreads.etc. I don't believe any FX strategy is 100% risk free - brokers slip orders especially during the news.etc.
I have used this strategy for a few months on the GBP/JPY with some great results.
The further price moves from the starting point, the greater the profit. It was excellent last July when GBP/JPY dropped massively.
To make this strategy work you need -:
The arbitrage opportunity arises because with spread betting you often get the opportunity to open a trade and have the pip values in the base currency (the first currency in a pair). All retail FX brokers have the pip values priced in the quote currency (the second currency in a pair). For example if you open a 100k GBP/USD position, the pip values will be $10 per pip. With spread betting you have the opportunity to have the pip values in GBP. Unlike retail FX with spread betting you don't open a set position size, you just select how much you would like to bet per pip movement. For example if you wanted to bet £5 per pip movement and the market moved 200 pips in your favor, you would have a floating position of +£1000. Margin requirements vary between brokers, but some only require margin for the maximum potential loss.
Notes and Observations on the UK Pound Financial Spread Betting Strategy-:
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