Meeting the odds and still being an active trader is today’s style! The trading market is one with full of adventures every day. One thing which is very sure of in this market is changing. So every day could be a fresh beginning and hence it needs a lot of smartness to be an active trader, by keeping the risk factors in mind. The risk management of the trading sector is a challenging aspect which has been worked out by the members of this sector.
Such continuous analysis has given the option of risk management by means of hedging and arbitraging which follow different theories and help in better working of the trades.Each of these is capable in their own way to fetch long-term profits from trading as an art. There are many types of arbitrage functions that could be used according to each situation in the share market. They are detailed further.
This is a type which is useful from the point of view of market makers. Market makers work on the factors like far more trading capital, more skilled in general, faster computers, more complex software system etc.
With such unique features, it is difficult for the people retail trading to use the pure arbitrage for managing the risk of loss, but there could be another form of arbitrage to suit the needs of retail traders.
This is unlike true arbitrage, as the name suggests it is coined with the aspect of risk. This deals with addressing risk and particular function levels. One example can be at merger and acquisition level. By this method, a company which has been undervalued is identified and takeover by a well-performing company is initiated so that the undervalued one begins to develop better. This will benefit all those who are in the process.
Another type of the risk arbitrage can be the liquidation arbitrage which is by finding the liquidation value of the assets of a company. For example, the current value of a share is less than its book value the company can choose the liquidation arbitrage. So this will prove to be a profitable approach.
Yet another model is the Pairs Trading in which is a less common method of arbitrage. It is also referred to as relative-value arbitrage. The method goes into finding pairs of companies with a long-standing good trading history and correlating between them. It is quite challenging to find such pairs easily and hence this method could be least preferred.