What is arbitrage-the uselessness of cash

Just a quick word on Arbitrage.
There are all these strategies about pairs trading, relative value, etc involving two different securities. They forget that buying anything with "cash" is also arbitrage.

One must remember that cash is nothing but a bet on a Government. The US, Japanese or Western European Governments keep your money safe and give you an interest-but when you move cash out into buying some stock you are arbitraging the cash for the security-because u see better value there. Instead of the Government giving you 4% per annum you play the gamble and want to get more than that-that's when you trade your "cash" for the security.

Cash is much worse than stocks for non-developed world Governments. Governments will default and currencies will devalue-but stocks and companies will stay often. Take Russia and Argentina as examples. Pull up charts of ROS and YPF to see what I mean-they stayed even when people holding cash in Argentine Peso and Russian Rouble lost loads of money because of devaluation.

All trades are arbitrage between "cash" and the securities bought or shorted with the "cash".


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