Geo-Arbitrage: Taking Advantage of Foreign Markets

Over the past few weeks I have been running into the word "arbitrage" a lot. Has that ever happened to you? It goes like this: you see a word somewhere, it sticks in your mind, and all of a sudden you find yourself hearing or reading that word multiple times over the next few days or week. So I decided to look it up. Arbitrage is defined as:


"The practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices."


The first time I ran into this word it was in the context of trading financial instruments. "Arbitrage" in finance usually has to do with the simultaneous buying and selling of the same or related securities in different markets to take advantage of unequal prices, resulting in a profit.

A great example of this is purchasing $1,000,000 worth of mortgage-backed securities on the stock market (that are backed by the government should they default) that yield 6% annual interest, while simultaneously purchasing a loan from a bank for $1,000,000 at 5% annual interest using the securities as collateral. Doing this, you have just locked in a 1% mortgage-backed security arbitrage profit with literally zero exposure. How? The securities are backed by the government should they default and the loan you took out from the bank is not your money. The interest you have to pay on the loan money is less than the yield on the securities, resulting in a profit.

Pretty cool right?

How does arbitrage work when there is a "Geo-" in front of it? To make it simple (I am a fan of simplicity) we will say that geo-arbitrage is "earning dollars, spending pesos, and compensating in rupees."

Geo-arbitrage is taking advantage of the different costs of living, currency exchanges, and tax differences from country to country. Stashing your US dollar earnings in the tax-free haven of the Cayman islands is old-school geo-arbitrage. Setting up an online business based in the US and getting paid in dollars, while outsourcing your life to Your Man In India and paying them in rupees, while also living in Cape Town, South Africa and spending rands, is new school geo-arbitrage.

Technology and free-floating currencies are making the world a better place for people willing to be location independent and leverage unequal prices in different markets. All it takes is Lifestyle Design

So the next time you are at a cocktail party and need a cool buzzword to throw around to make you sound intellectual, give geo-arbitrage a try.