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Arbitrage basics | Finance & Capital Markets | Khan Academy

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Arbitrage Basics. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/put-call-options/v/put-call-parity-arbitrage-i?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/put-call-options/v/call-writer-payoff-diagram?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Finance and capital markets on Khan Academy: Options allow investors and speculators to hedge downside (or upside). It allows them to trade on a belief that prices will change a lot--just not clear about direction. It allows them to benefit in any market (with leverage) if they speculate correctly. This tutorial walks through option basics and even goes into some fairly sophisticated option mechanics. About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything Subscribe to Khan Academy’s Finance and Capital Markets channel: https://www.youtube.com/channel/UCQ1Rt02HirUvBK2D2-ZO_2g?sub_confirmation=1 Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy
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Text Comments (82)
Jean-Baptiste Dubois (1 month ago)
Thank you!
Great video. I have done a video on sports betting arbitrage on my channel.
Cendy A (2 months ago)
Well done!
Barbaryotaku (2 months ago)
How do you like dem apples
Thank You...great video...
Creative Universe (4 months ago)
Excellent tutorial explanation very good exceptional thanks
Bryan Guerra (5 months ago)
Apple Arbitrage, you say? 🤑
USA Houses (5 months ago)
Cool. Very interesting. Do you know of any arbitrage spreadsheet calculator formulas for currencies, cryptocurrencies, etc?
FinLadder (4 months ago)
Ismael Earn Cash Daily (7 months ago)
David Peterson created ARB coin this will be $1000+++ per 1 coin soon
Carla Paulino 2 (7 months ago)
wow what a beautiful explanation THANK YOU
FinLadder (4 months ago)
Mini Mavuso (7 months ago)
Perfect explanation
You should make finance videos for regular people:) with no economics background.
Khonic (7 months ago)
Başak Yenel it’s all pretty simple without an Econ background. Econ in itself is very simple just look up Econ basic videos here and you’ll get the basics very quickly
Mr. Lyrics (9 months ago)
Thank u
honey Chawla (9 months ago)
I am looking for cash holding. Can any one help me
Rizwan khan Chauhan (10 months ago)
any algotrading software name for arbitrage trading plzzzz???
Laced Heat (11 months ago)
its not risk free as you still have to sell the apples. If you arent able to sell your money is then tied up.
Utkarsh Mishra (11 months ago)
mcraythyra7 (11 months ago)
thank you. Glad I found this channel!!
Marek Lewandowski (11 months ago)
If you're looking for an arbitrage tool on cryptocurrencies you can try tool that I coded myself: arbitool (dot) eu. Use code YOUTUBEGUYS for a 20 percent dicsount :)
Ihsan Baig (1 year ago)
great example, jazakAllah
1010110 i (1 year ago)
He is really good with that mouse
Fateen Ibrahim (1 year ago)
Malcolm Nicholson (1 year ago)
This works perfectly as long as the fees and charges don't eat up your profit.
FinLadder (4 months ago)
Headhopper19 (1 year ago)
really handy in the crypto exchange world. thanks man
USA Houses (5 months ago)
The challenge there is the crypto exchanges either block trading, depositing or withdrawals when the best opportunities look like they should be available. I'd really love a nice spreadsheet with some nice formulas built in to calculate the cryptos and fiat currency trades and transfers.
Eyad Alkholy (1 year ago)
now I like trade
Tingxuan (Sunny) Xu (1 year ago)
you are fantastic Sal
loudrockacdc (1 year ago)
I'm confused. Why do prices go down when supply goes up? Doesn't supply go up when sellers want to sell more at higher prices?
FinLadder (4 months ago)
jmitterii2 (1 year ago)
Loudrockacdc, you're right too if considering the effects over time, that yes, more demand in one market begins, more sellers will enter that market when prices begin to go up. You can also have more sellers enter a market if they see volume of sells go up, they need to find a market that is quickly getting rid of apples at a steady price, no big leaps up or down. New sellers may find that cheaper market better as they have lots of quantity and will maximize their profits by having a stable price and make money off volume of sales... the higher price market means more of their apples don't get sold quick enough and just rot, or more expense finding more markets to deliver and try and sell their apples. So in this scenario, the key phrase: "all other things being equal"... meaning quantity supply is the same for both markets, and no other new quantity supplied by some new supplier or by the same dealers are available over the period of time in conjecture. That way you get the idea in the short run that markets malfunction. Over time they eventually may correct to a fair price that nobody is making a risk free return, detriment that some people are getting screwed because no extra value benefit is being generated. In the real world you can have many things happen that may make arbitrage last longer, or shorter. Many reasons why it could last longer, such as suddenly volume kicks up, and guess what that dealer in the cheaper market has a warehouse of more apples: more supply and wow! I'm getting rid of these apples quicker at this price, I'm not changing the price at all, I want these sold, and I'm still maximizing my profits (MR = MC at this price, if I raise the price my quantity demanded will go down). So they get some more to sell. So price may stay the lower $1 Now in the buyer market across town, they're getting inundated by apples, and not many are buying them, so they simply won't even buy anymore. Only sell them for $1.50. Why not drop the price? Well, they have enough quantity supplied minus the time it takes before an apple rots and becomes unsellable that their marginal revenue equals marginal cost. They're maximizing their profits still. Then you make ask why does the higher priced market keep selling their apples at a higher price? Who are the suckers? And why? This is where other economic effects that could occur (when you don't state all things being equal), that there's a prestige factor from buying apples from that market compared to the cheaper market... the tents look better, its nearer to well to do peoples' home and allows you to mingle with people of means (snob appeal), perhaps they advertised how wonderful the apples are, and everyone love them, everyone's doing it. Despite the fact they're the same quality apple if not the same damn apples from the cheaper market sold to the expensive market (band wagon appeal). The two markets are considering one can buy and sell; that the markets will always have a buying and selling price equal. Never is the case though. Often markets will never buy, most are only going to sell whatever supply they have; they have a separate whole-sell market for their buying. Or if they are primarily a selling market, but do buy, they limit their quantity buying; their buying is strictly limited, and always lower than the price at which they're selling. So if they get a flood of sellers asking them to buy their apples, they'll buy slightly lower than what they themselves are selling at, and stop buying their apples all together once they have reached a certain quantity in inventory. But they'll continue themselves to sell the apples, and at a charge up from whatever price they themselves bought at. Markets are more complicated than described. This is just providing insight that yes in fact in short term you have price disparity where you can make money risk free. A form of rent seeking. This can happen in any markets including currency exchanges, housing, stocks, cars, etc. The idea is that markets will eventually find some reasonable stable price that doesn't allow people to screw each other risk free for a long time, only for a little while. But there are other possible outcomes that can make the screwing last longer, or shorter: The high price market refuses to buy apples from others, but only sell their own apples, until their quantity supplied (inventory) is low and they need more apples stocked up for sell. They advertise using various persuasive techniques. The cheap market is engaging in a price war dumping their apples, or seeks to make money off volume of sales because they have lots of supply of apples. And many other phenomena.
loudrockacdc (1 year ago)
That makes sense, thank you!
AR N (1 year ago)
loudrockacdc when you have excess supply and your current demand doesn't meet the supply the price goes down so as to create more demand. So say the supply was 20 apples but the demand was for 15. You have 5 apples in excess which need to find a buyer, you will lower your price quotation per Apple to reach an equilibrium state where the supply is evenly met by demand.
Anne Lin (2 years ago)
oh Khan, here I am watching your stuff four years after graduating high school ;P
David Bourgeois (2 years ago)
selling at level 5 on perspected from lvl 2
MonitorFX (1 year ago)
Snow Raven (2 years ago)
Great explanation. Need that for my 7 exam.
Glen Otis (2 years ago)
this sounds like basic business to me, no ? buying low and selling high ? although i am ignorant, explaining why im here in the first place. an example with real financial situations would be more helpful in my opinion.
Max Luo (2 years ago)
Japan has a share of apple for 99.99. US (on the other side of the world) has Apple trading at $100. If you have a computer program that automatically finds these price differences you could guarantee a 1 cent profit if you bought from Japan at 99.99 and sold at 100 exactly in the US
Idriss (2 years ago)
Thank you, that was very well explained
冉 冉 (3 years ago)
Marissa CeCot Petersen (3 years ago)
Thank you for the upload. Excellently put and easy to understand :)
betina mountou (3 years ago)
Thanks for your help because I now have an idea of what arbitrage is all about...
Mr. Awesome (3 years ago)
LoveU :-*
Pratibha arora (3 years ago)
please make a video on hedging too..it would be really helpful
FinLadder (4 months ago)
Brian LaForge (3 years ago)
+Pratibha arora i think it's when you say take out a mortgage and buy a house then lease your house to someone for as much as your mortgage payment... you've then "hedged" your investment and the tenant is effectively buying you your house.. get it?
Glass Eye Gaming (3 years ago)
Hey Khan Academy.... what kind of software are using to create this video? I'd like to make videos using this same method. Thanks in advance if you reply. :-)
Mithun Pawar (3 years ago)
Good basic to understand with examples.
Sabin Manandhar (3 years ago)
+Mithun Pawar Hey I love Mrs. Khan video, particularly this video about calculate arbitrage. Another resource I also found helpfull for gambling sites is Grathaw Arbitrage Software Expert - it will be on google if you need it.
Sue Bee Bee (3 years ago)
+Mithun Pawar Good day!. Another resource I also found useful for free sports arbitrage software was Grathaw Arbitrage Software Expert.. Google and you will find it.
Adam Roth (4 years ago)
Nice and simple. Thanks!
fleshcookie (4 years ago)
I missed very much the pointer in the last 9 or 10 videos. 
sumeet pandey (4 years ago)
This can also be a case for two different economies involved in trade.
von ivan earl sambajon (4 years ago)
Very Helpful... 
Jhov Suico (1 year ago)
Not certain about the points made but ,if anyone else wants to discover how much money can you make matched betting try Grathaw Arbitrage Software Expert (do a google search ) ? Ive heard some awesome things about it and my co-worker got excellent success with it.
johnny uncle (4 years ago)
Excellent !!!!!!!!!!
FinLadder (4 months ago)
Zdenka Sun (4 years ago)
Thank you :)
Geoff Chen (5 years ago)
HI, Khan, what software do you use for your drawing on the video
Marsellus Wallace (5 years ago)
The movie brought me here .
G M (5 years ago)
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G M (5 years ago)
Me (5 years ago)
How did you write the video out like that?
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DonBiSuperKiss (6 years ago)
Clicked on this vid to learn about EXO.... but wow, this is interesting ^^
Freddie181 (6 years ago)
thumbs up if you wanna make money!
DaddyGuiver (6 years ago)
This is just the basics in any business. Buy Low – Sell High So people now call it “Arbitrage”. Big deal! What is not mentioned here is how you need to firstly identify the demand and find a source to buy low.
Mike 'Yen (7 years ago)
<3 really good video
Aron Hyman (7 years ago)
Thanks bra!
David Dolynny (7 years ago)
Very Helpful!
Strawberrysurf (7 years ago)
Awesome as a bright sunny day!!! Thanxie!!!
learnanddeliver (7 years ago)
Awesome, this is very clear. Thanks Sal. I have an exam coming up on a Harvard case. This will help me to crack the arbitrage related questions.
Naylob Swisher (8 years ago)
I wouldn't call it risk free. DEA is getting good at detecting heroin hiding spots.
Kelly Posey (8 years ago)
thanks for this explanation! It's clear to see now one of the ways which the current system allows for manipulation for profit
Julian Merkel (8 years ago)
@ChessNetwork or we assume no transaction costs :P
ChessNetwork (8 years ago)
Risk free assuming you don't wreak your bike while traveling. :)
=NolePtr (1 year ago)
Oi Chess Network, hello.

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