Arbitrage stories from a freshly liberalized market

What was the most important difference from investor’s point of view between our current age and the 1980’s and early 1990’s? Clearly the available level and quality of information. And if it is limited in general and not available to everyone in the same quality, this might trigger short term arbitrage opportunities. Especially in a country where first attributes of modern capital markets were just introduced. This post focuses on four colorful examples from different financial segments of a freshly liberalized economy, Hungary which stories could serve as a solid basis for educational purposes (what does arbitrage mean in real practice?) as well.


Triple deposit rates per month

First of all let’s see what was the most important ‘to do’ of an average rational Hungarian deposit owner. Actually running between 2 or 3 local offices of retail banks with the savings resulted in triple rates in a month for an individual. In order to understand the background, the owner of the deposit was entitled to receive the entire rate after the monthly period from OTP (Orszagos Takarekpenztar, the most significant player of the Hungarian banking market nowadays as well and the most freqently traded share on Budapest Stock Exchange) only if the money was on the bank account on the 26th of the given month, practically no other criteria was taken into consideration. Additionally other local institutions followed the same approach but their effective date was the last day of that month. Because Postabank employed daily deposit rates, it was beneficial to hold the savings at Postabank until the last days of the period and collecting the rates from other banks via transfering the money to them for 1 or 2 days. Transfering meant physical delivery and this explaines why extremely long qeues characterised the branch offices of Hungary that time. Due to their oldfashioned systems the banks could not change this picture significantly for many years.

Anomalies on the local fixed income market

Due to the lack of IPOs, commercial bank loans, foreign loans and notable state subsidies, local fixed income issuances were relatively popular and could serve a good basis for the Hungarians to start learning the basics of capitalism. On the other hand calculating the fair, non-arbitrage price of an interest bearing bond was practically impossible for many people. This offered a great arbitrage opportunity (often more than 5%) for a small qualified group and the cost of the transaction was practically the walking time between two offices…. Not surprisingly many university fresh graduates prolonged their career starting and HR interviews and entered into this relatively easy game.

The story of IBUSZ, the first stock on the market

The date of 21 June 1990 has historical importance in Hungary. This is the birthday of the Budapest Stock Exchange and the first trading day of IBUSZ in Budapest and Vienna. Right after the start the first bid was settled at HUF 5600 and the closing price of that day was HUF 8000. However it closed the year at HUF 4820, less than the initial issuance price. Taking into consideration the experiences of the Austrian-Hungarian Monarchy, the existence of parallel trading in two different locations offered great geographical arbitrage opportunities. Even after the deduction of trading costs the price of Budapest was significantly lower and past data explained significant correlation between the current price at Budapest and the yesterday quote of Vienna.

Playing with the swap points

In 1991 and 1992 the central bank of Hungary posted FX forward quotes on regular basis. Swap point was defined as the difference between spot and forward prices. Obviously the central bank updated its spot prices every day, however the swap points remained fixed in a particular period. Even a relatively small change in spot quotes violated the classic no arbitrage formula (forward price equals to the spot price inflated by the risk-free rate) according to which at initiation the value of the forward contract must be zero. Subject to positive or negative fluctuations in the actual market prices, spot purchase with future selling or immediate short position with forward selling were the appropriate market neutral strategies (at the costs of the central bank). Moreover usually the bank offered upward sloping curves, lower swap points for shorter maturities and higher for the longer end of the curve. In this case the beneficial trading strategy was forward purchase for the shorter maturity and forward selling for the longer period.

sources:, Tozsdesztori,