Does Arbitrage Opportunity Occur in the Foreign Exchange Market? Evidence from Nigeria

Abstract

The study has examined arbitrage opportunity in the Nigerian foreign exchange market. Ex-post facto and descriptive research designs were employed in this study. For the purpose of brevity, the Central Bank official dollar to naira exchange rates were examined for the month of May 2017 with the aim of ascertaining the arbitrage gain arising from the trade in the market and given that the investor has a quantum of investible funds to transact with. Findings made revealed that arbitrage gain arises in transactions in the Nigerian foreign exchange market. Investors/traders profit from the market if they have enough funds to trade with. Intuitively, the arbitrage gain prevalent in the informal FX market, the parallel exchange, is significantly high in Nigeria. The activities of the Bureau De Change and lopsided and politically influenced policies of successive government in Nigeria have continued to cause the somewhat arbitrarily arbitrage gains/opportunities in the Foreign Exchange market in Nigeria. This study therefore recommends that investors with idle funds should take advantage of investing and optimizing the arbitrage opportunities in the FX market. More studies should be carried out in the security market to empirically determine arbitrage opportunities/ gain in Nigeria.