Saturday 31 July 2010

Running the arb

I'd asked why nobody was running arbitrage between the Aussie books and iPredict on the Australian election.

At current prices, Centrebet pays $1.4 for every dollar bet on Labour to win. So, $0.7142 gets you $1 if Labour wins. iPredict charges $0.20 for a contract paying $1 if the Liberals win. You can buy both contracts together then for $0.9142. The election is three weeks away. Spending $0.9142 gets you $0.0858 less minor transaction fees in three weeks time with certainty. The one-month return is better than 9%. Currency isn't an issue because CentreBet lets me trade in $NZ, so no exchange rate risk needing separate hedging.

Bugger it, I'll run the arb if nobody else will. I'd gathered a reasonable long Libs position at iPredict just on the basis that it was relatively cheap and that iPredict prices ought move towards Aussie prices over time. I've now laid off some of that risk at CentreBet while going further long on the Libs at iPredict through a combination of shorting Labour and buying Liberal.

If Labour wins, I'm up $43. If the Liberals win, I'm up $370. Bring on the election! I can cheer for both sides!

Price discrepancies across markets offend me. I can't make money off most things that offend me.

Why are the Kiwis so optimistic about Aussie Labour relative to the Australians?

Update: Boy, do I ever wish I'd waited a couple days to lay off that risk. Ah, well.

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