Reply to the 3 Attached Discussion Board Post (200 words per post)

Key Term: Arbitrage

Arbitrage is present in financial markets all over the world. While reading the assigned chapters for this module and continuing the study for my GBCA this term should out to me. Colombia has a large presence of gangs, drug traffickers, and other illegal groups. Researching further into this term has allowed me to look further into the financials of not only the Colombian economy, but also the way that these groups are able to affect not only Colombia’s economy, but also other economies around the world.

Explanation of the Key Term

Arbitrage can be defined as the purchase of an asset, which is quickly sold for profit in another market. These assets being purchased and sold are currencies, securities, products, or any other financial instruments. Arbitrage occurs due to inconsistencies in these assets due to inefficiencies in the market. Market prices are monitored, and the item or items are purchased and most times simultaneously sold to the market with a lower price, although they can be held in anticipation of a higher price and sold at a later date. The price difference must be enough to cover the asset and any associated fees with the transaction to make it worth the exchange.

Major Article Summary

Bristow, Matthew. Colombia's Discount Currency Exchanges Are Funneling Drug Money. (2016). Bloomberg.com. Retrieved 25 November 2016, from http://www.bloomberg.com/news/articles/2016-01-28/cocaine-s-unbroken-grip-on-currency-market-trading-in-colombia

Colombia is well known for its drug production and trafficking of cocaine. But his article demonstrates just another area of this high dollar business. Colombian drug dealers and illegal miners are taking the money that they gain while selling drugs and exchanging them for pesos using arbitrage as their method, and they are using tourist as their vessels. These individuals are setting up on street corners, inside malls and shopping centers, outside of restaurants, and even outside on the front steps of the nation’s central bank. These criminals use documents that make them appear to be official, but do not record the trade or transaction, and make the exchange of currency at rate that is ten percent lower than the rate of the bank, making this very enticing to their customers.

Another area of business for this group is done in exchange rate houses. Money is collected outside of Colombia, then exchanged and returned to the seller in pesos. In this transaction the seller is charged a commission rate of ten to twenty percent. This is typically large sums of money where real estate is used as collateral; so if the money is seized in the process the seller is given real estate equally the amount of money that is used in the exchange.

This exchange is not limited to tourists only; Colombian residents participate in this exchange, even though they know that it is illegal. While this is a perfect example of arbitrage that takes place daily in Colombia, it is also a way that drug lords launder their drug money. This is a huge business for them. While government agencies are cracking down and making some head way on the war against drugs in that company, tourist and residents alike are helping these groups profit yet again on the money that they are making illegally.

Discussion

1. The article above, Colombia’s Discount Currency Exchanges Are Funneling Drug Money relates to this module, as it is an example in the way that arbitrage is carried out. While this transactions should be carried out using the correct forms, following the correct and legal processes, it shows that no matter what processes are in place there will always be those that find an illegitimate way to do legitimate business. The selling of goods and monies is a way that businessmen or businesses profit from things that they have that are more profitable in other markets. These Colombian crooks are taking illegal money and selling it at a discounted rate to profit from money that they obtained illegally. Tourist and locals alike should beware when doing this type of business. Not only is it illegal, but it is also associating them with the wrong group of people, and potentially puts them in harms way. Honest business will always be the best practice.

2. The remaining articles on my list also discuss arbitrage, but they are examples of other resources, crude oil and energy sources. As stated above arbitrage transactions occur every single day all over the world, involving money, food, resources, etc. These resources are examples showing legitimate and legal processes that arbitrage is used. The Colombian article was more relevant for me due to the fact that I am using this country for my GBCA project, and it helped me understand more about the country and drug trade that occurs there.

Sources

Bradbury, K., Pratson, L., & Patiño-Echeverri, D. (2014). Economic viability of energy storage systems based on price arbitrage potential in real-time U.S. electricity markets. Applied Energy, 114, 512-519. doi:10.1016/j.apenergy.2013.10.010

Trade thin in US spot market as arbitrage narrows; colombia releases loading schedule. (2003). Oil Daily, , 1.

Peter Kiernan, Washington, and Juan Pablo Toro, Bogota. (2002). Atlantic arbitrage pressures US crude. Oil Daily, , 1.