Sunday, March 23, 2008

Simple Arbitrage

If I had a big lump sum of money, I'd put it in a (or several) FDIC insured high yield saving account(s). The idea of living on fixed income, in this case, the interest, is far more appealing to me than seeking capital gain in the stock market because the risk associated with the former is much less than the latter. Putting money in FDIC insured savings is almost risk-free. The problem is that I don't have this big lump sum of money. This thus creates the following arbitrage scenario:
  1. Borrow with 0% or low interest rate.
  2. Deposit the borrowed money into high yield (higher than the interest rate you borrow at) saving accounts or CDs.
  3. Pay back the borrowed money before the borrowed interests go up.
These are the general steps. There are many details to be furnished to complete a sound arbitrage. One of them is that where can you borrow at 0% or a low interest rate? This is easily answered by App-O-Rama, a website that gathers and publishes up-to-date "good" credit card offers from many financial institutions. If you have a good credit, you will have no trouble of getting approved by multiple cards simultaneously. Here is an example. Another important thing to keep in mind is the date when the borrowed low interest rate becomes a high rate. Before you jump in this arbitrage game, make sure you calculate when and how to pay back the borrowed money, and how much profit you gonna make. Also, are you purchasing a house soon? If so, arbitrage is probably not a good idea for now since most of the credit card application process will result a hard pull on your credit and hence lower your credit score.

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