13 – L2 11 2 Arbitrage Farmers Market V1

Hi, there. Do you remember Betty from module one? She used to sell fruit at the local farmers market. Hi, Betty. What are you up to these days? Hi, Eddy. Well, I’ve been working as an investment analyst at a new hedge fund Roulant and partners. Well, that’s cool. What brings you to the farmers market? Well, I like to check out the real-time pricing and trading that goes on in the farmer’s market. It reminds me of the trading that goes on in the financial markets. That’s an interesting connection. I noticed that one of the farmers here, Brock cells oranges for $1 each while another farmer Cindy sells a bag of 10 oranges for $9. I was wondering how you look at this pressing from the view of a hedge fund analyst. Well, I could buy 10 individual oranges from Brock at $1 each or I could buy from Cindy and pay $9, but still receive 10 oranges. I’ve also notice that there are tons of customers walking around who want to buy an orange for a dollar. This looks like an opportunity for arbitrage. Can you walk me through what you would do? Sure. In general, I like to buy low and sell high. So, I’d like to buy a bag of 10 oranges for $9 and then sell them for a dollar each. I also want to make sure that I don’t get stuck holding the bag. How would you avoid getting stuck holding a bag of oranges? Well, first I’ll try to find 10 customers who want an orange. At the same time I’ll make an agreement with Cindy to buy the bag. So, you’re buying and selling at the same time. Exactly, and I earned a dollar profit by using arbitrage. So, now the question is what will you do with your $1 in profit? Well, I’m starting to feel a little bit hungry, I think I’ll buy an apple.