TESTING ARBITRAGE OPPORTUNITIES: THE CASE OF THE NIGERIAN FOREIGN EXCHANGE MARKET

Aigbovo, O.¹ and Izekor, A.O.^2*

¹²Department of Banking and Finance, University of Benin, Benin City, Edo State, Nigeria;

¹omoruyi.aigbovo@uniben.edu, ²andyimade@yahoo.com

 ABSTRACT

Utilizing the exchange rates of the Naira to the three most commonly traded currencies—the US dollar, the British pound, and the euro—the study examines the presence or absence of foreign exchange rate arbitrage opportunities in the Nigerian foreign currency market. Specifically, the exchange rate for the month of December 2017 (that is, 4/12/17 to 29/12/17) was used in the analysis. The study employed the ex post facto and descriptive research designs. The analysis confirms the existence of arbitrage opportunities in the foreign exchange market in Nigeria. Findings from the study also reveal that there is a clear net gain in the parallel market compared to the official government rates. The implication of this is that the effort of the government to attain a level of convergence between the parallel and official rates seems not to have yielded the desired result. The study makes the suggestion that the regulatory body (the Central Bank of Nigeria) keep making sporadic interventions in the foreign exchange market to address the unfavorable movement in the Nigerian naira that results in the emergence of arbitrage opportunities in the foreign exchange market.

Keywords: Arbitrage, Official Arbitrage Spread, Parallel Arbitrage Spread, Foreign Exchange Market, Nigeria

JEL CLASSIFICATION: G 12