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To: PAL who wrote (113477)	3/30/1999 6:53:00 PM
From: Marq Spencer	Respond to of 176387

OT OT OT (more Arbitrage stuff) Paul, What you described is not arbitrage, it is more like asset allocation. Arbitrage is when the two positions have the same underlying characteristics, but are trading at different value due to inefficiencies in the market. The arb watches for these discrepancies and takes a position to benefit from it. For example, if gold was selling for $100 an ounce, and the gold April 2000 future was going for 105 and the current interest rate was 4.5%, the arb would do the following: Get a $100 loan for a year at 4.5%. Buy 1 ounce of gold for that $100. Sell 1 gold April 2000 future (expires on 3/31/2000) for 105. When the stuff is settled on 3/31/2000, the arb would receive $105 for the gold, and pay the bank $104.5. This way the arb makes $0.50 for the year. Note that any changes in interest rates, gold prices, etc. do not effect the position. However, the commissions on each of these trades is going to kill the profit, unless it can be done in really large volume. However, really large volume would lead to changing the price of Gold, its April 2000 future (most likely), or the interest rates (least likely), and would incur cost of storing the gold in a safe place. Anyway, that's the kind of stuff arbs do all day long. Now isn't that fun <vbg>. In your example, if the interest rates rose, the market could correct, and your QQQ would be worth less than the loan principal. - Marq.