Arbitrage Yield Calculation: Uncovering Hidden Profits

1. Identify the Arbitrage Opportunity: Look for price discrepancies of the same asset across different markets or platforms. For example, if Bitcoin is priced at $30,000 on Exchange A and $30,500 on Exchange B, there is an opportunity for arbitrage.

2. Calculate the Potential Profit: Subtract the lower price from the higher price. In the example, the profit per Bitcoin would be $30,500 - $30,000 = $500.

3. Consider Transaction Costs: Deduct any transaction fees or costs associated with buying and selling the asset. If the transaction fees are $50, the net profit would be $500 - $50 = $450.

4. Determine the Arbitrage Yield: The arbitrage yield is the percentage of profit relative to the initial investment. To calculate it, divide the net profit by the initial price and multiply by 100. In this case, the yield would be ($450 / $30,000) * 100 = 1.5%.

5. Adjust for Risks and Exchange Rate Fluctuations: Consider the risks of price fluctuations and currency conversion rates if you are trading international assets.

Example: Let’s say you spot an arbitrage opportunity with a cryptocurrency pair. You buy 10 BTC at $29,500 each on Exchange A and sell them at $30,200 each on Exchange B.

• Profit Calculation: (10 * $30,200) - (10 * $29,500) = $7,000.
• Transaction Fees: Assume $100 for buying and $100 for selling, totaling $200.
• Net Profit: $7,000 - $200 = $6,800.
• Arbitrage Yield: ($6,800 / (10 * $29,500)) * 100 ≈ 23.02%.

By understanding and applying these calculations, traders can effectively measure the profitability of their arbitrage opportunities and make informed decisions.