Ever wondered how you could make money without much effort? Arbitrage offers exactly that; it is the simultaneous purchase and sale of an asset (or anything for that matter) with the aim of making a profit from the price differences in the market. Simply put, you’re earning an income because there’s inefficiency in the market. Take Green grams for example. A 90Kg bag wholesales at KES 5600 in Mombasa while in Eldoret it is snapped up for KES 10800, almost double the amount. Transport the commodity from source to Eldoret at a cost of approximately KES 1600 and you have yourself a profit of around 50%.  You don’t have to go to Coast province to make the purchase, neither do you need to accompany it to Eldoret. All you have to do is make calls. Therein lays the little effort.

Arbitrage cuts across anything that has a monetary value. All one needs to do is keep an eye out for price differences and sources of demand and supply. Some are explicit and require even less exertion. The best example of this is currencies. The rates are always changing, and there’s always individuals profiting from it. The forex market - as it is called- is the most liquid market on the planet. Demand and supply are always available, no matter the currency. Have you ever stopped to question how most banks in Kenya this year recorded double-digit profit figures? Why they made such a killing is directly related to the US dollar fluctuation in the last quarter of 2011, but how exactly did they do it? Maybe this illustration will help you understand one of the ways they did it.

Assume that the Kenyan shilling exchanges at 10 to the South African Rand and 80 to the US dollar. What most think is that it translates to 8 Rand for 1 dollar. Wrong. South Africa has its own exchange rate to the dollar that is determined by the country’s trade with the US, not with Kenya. That said, it means there’s a chance their exchange rate might be higher or lower than what we assume it to be. For example’s sake, we shall take it to be 9 Rand to the dollar. Here's what you stand to make from simply taking advantage of our different exchange rates. If we start with KES 100,0000;

Convert Kenya Shillings to US dollars:            100,000 / 80 = 1,250

Convert US dollar to South African Rand:                1,250 * 9 = 11,250

Convert SA Rand back to Kenya Shilling:           11,250 * 10 = 112,500

You basically made KES 12,500 profit because the market is not perfect. Now picture the same with even more money. That's what taking part in the most liquid market in the world means. Banks, individuals and investment groups do it. Arbitrage, a very powerful money making tool with almost no effort. Or at least less than other methods.