The factors that affect currency fluctuations are always changing. Political events, economic conditions, economic outlooks, interest rate differentials, fiscal policy, and U.S. Federal Reserve involvement are just a few of the influences that affect currency movements. Occasionally, movements in these factors create arbitrage opportunities across exchanges that ready investors can take advantage of.
If the exchange rate between the dollar and the Canadian dollar is 1.50 on the U.S. exchange and 1.52 on the Australian exchange, large institutional investors will jump in and force the exchange rates to match again. Momentary differences in exchange rates last only for a few minutes. In order for the arbitrage opportunity to be profitable, investors must have a significant amount of liquid cash.It's virtually impossible for average investors to take advantage exchange rate differences. There are entire departments of investment firms that wait for arbitrage opportunities to arise. In addition, most investors don't have millions of dollars to throw into different exchanges. The most profitable way for average investors to take advantage of currency arbitrage is to invest in a currency hedge fund.Hedge funds pool money from common investors and invest like an institution. Hedge funds that are focused on currency trading can take advantage of arbitrage opportunities and pass the returns onto the investors. In addition, a professional hedge fund manager will make currency speculations with the pooled money. The advantage of investing in a hedge fund over a mutual fund is the ability of hedge funds to short currency positions. This is a great way to invest a portion of your money in the currency markets without having to invest the time.
