In the context of
securitisation, arbitrage is the practice of buyin’ and sellin’ securities in different markets or in different forms in order to make a profit from a difference in the price. For example, an investor might buy a securitisation security in one market and sell it in another market at a higher price. The investor would make a profit on the difference in the prices.
Arbitrage can be used to profit from inefficiencies in the securitisation market. For example, if the price of a securitisation security is higher in one market than in another, an investor can buy the security in the cheaper market and sell it in the more expensive market. The investor will make a profit on the difference in the prices.
Arbitrage can also be used to reduce risk. For example, an investor might buy a securitisation security that is protected by an Asset Protection Scheme (
APS). The APS will protect the investor from losses in the event of a default on the underlying
assets. This can reduce the risk of the investment.
Arbitrage is a complex process and it is important to understand the risks involved before engaging in it. However, arbitrage can be a profitable and risk-reducing strategy for investors who understand how to use it.
Here are some of the benefits of using arbitrage in securitisation:
- It can be a profitable strategy for investors who understand how to use it.
- It can help to reduce risk by protecting investors from losses in the event of a default on the underlying assets.
- It can help to improve the efficiency of the securitisation market by eliminating inefficiencies in the pricing of securities.
Here are some of the drawbacks of using arbitrage in securitisation:
- It can be a complex process and it is important to understand the risks involved before engaging in it.
- It can be difficult to find opportunities for arbitrage, as the securitisation market is constantly changing.
- Arbitrage can be a risky strategy, as it is possible to lose money if the prices of securities move against the investor.