How Do I Start Dollar Arbitrage Business Without Heavy Capital Investment

Dollar arbitrage is a form of currency arbitrage where the U.S. dollar acts as a vital pecuniary instrument for plying the arbitrage. Since the U.S. dollar is a popular currency against which the values of other global currencies can be measured, it is never a bad idea to consider an arbitrage venture that relies significantly on this currency.

In Nigeria, for instance, the worth of the naira is most commonly determined by measuring the naira against the U.S. dollar and ascertaining the rate at which it exchanges for the USD.

At the time of writing this post, $1 exchanges for naira at the rate of #415, as per the official rate of the CBN. While this is a clear indication that the U.S. dollar is a much stronger currency than the naira, it may further buttress the assertion that dollar-based currency arbitrage is a profitable business to do in Nigeria. As a plus, the U.S. dollar is a globally popular currency for which you can easily find buyers across currency exchange platforms within and beyond Nigeria.

In its simplest definition, dollar arbitrage in Nigeria is a business involving the use of naira to purchase dollars that you eventually sell for profit. This business, by extension, incorporates the strategy of purchasing the dollar at a favourably low rate and then reselling (usually almost immediately) at a rate that earns you a profit. While profit-making may seem easy to fantasize about business in Nigeria, this might not be the case in reality as most people are not willing to exchange their dollars for the naira at low rates.

Even though CBN’s official dollar-to-naira rate reads $1/#415, many dollar holders in Nigeria are willing to sell their dollars at much higher rates. This is just why it is unsurprising to find some sellers asking for as much as #550 for each dollar they are willing to sell.

If you buy dollars at a rate in excess of #550 per dollar whereas you seek to resell the dollars, you may struggle to make a profit since most Nigerians might not want to buy from you at a higher rate. But because dollar arbitrage in Nigeria is done with the intent of making profits, you definitely need to adopt a strategy that will yield reasonable gains. It is to this end that we have come up with this dollar arbitrage startup guide that will not only show you how to begin dollar arbitrage in Nigeria but also walk you through the strategy for making a profit from the business.

But before that, here is an overview of the business of arbitrage in general.

Arbitrage is defined as an attempt to profit from price disparities through the simultaneous purchase and sale of an asset (currency, security, etc.) in different markets. In that wise, arbitrage opportunities refer to the anomalies arbitrageurs deem favourable and which occur due to market inefficiencies. Such anomalies may manifest as price discrepancies across markets, thereby paving the way for arbitrageurs to profit from buying assets from markets with lower prices and reselling (almost quickly) in markets where the assets are highly-priced.

Arbitrage is a kind of complex trade-specific business and so, there are lots of strategies that arbitrageurs can adopt in their bid to harness arbitrage opportunities and maximize profitability in the long run. These strategies may be alternatively seen as forms of arbitrage trading or the different types of arbitrage trading strategies.

To broaden your understanding of arbitrage, we’ve listed out and explained seven of the common types of arbitrage strategies.

Types of Arbitrage (Strategies)

Statistical arbitrage
Covered interest arbitrage
Risk arbitrage
Riskless arbitrage
Fixed-income arbitrage
Convertible arbitrage
Index arbitrage

Statistical arbitrage: contracted as “stat arb”, statistical arbitrage is based on the use of algorithms for deep analysis of price irregularities amid lots of financial instruments. While it represents a higher variant of pairs trading, statistical arbitrage is a trading strategy widely adopted by hedge funds and investment banks.

The algorithms involved in statistical arbitrage are considered complex as they are built through data mining and advanced statistical methods. In statistical arbitrage, the trading duration can stretch over a number of hours or up to a couple of days, thereby justifying that statistical arbitrage may be rightly classified as a medium-frequency trading strategy.

Covered interest arbitrage: this arbitrage strategy is a form of interest rate arbitrage in which the arbitrageur cashes in on interest rate disparities and avoids (or significantly reduces) exchange rate risk through adopting a forward contract. While the arbitrageur aims to rake in profits through the interest rate differences between two countries, he will also want to be sure that the return yieldable from his investment in a given foreign currency outweighs the associated cost of hedging and the exchange rate risk. It is only when this is guaranteed that the arbitrageur can rest assured that covered interest arbitrage can take place.

Risk arbitrage: this is notably a risk-carrying arbitrage strategy that is also known as merger arbitrage. Retail investors get attracted to this kind of arbitrage as it is an opportunity for them to profit from the stock sales. In clear terms, the chance of risk arbitrage presents itself when corporate outfits are on the brink of critical events such as bankruptcy, acquisition and merger. Due to the uncertainty that often surrounds a company about to experience such events, some investors consider this the right time to buy the company’s stock. They may therefore purchase the stocks of the companies involved in the merger/acquisition attempt.

At the end of the merger or acquisition, these investors then opt to sell the stocks in the hope of making profits.

Riskless arbitrage: this arbitrage strategy entails the immediate sale of an asset purchased. Notably, the arbitrageur sells the same asset at a higher price. Since he sells the same asset immediately and realizes his profit on the spot, the arbitrageur does not expose himself to any risk that may arise from market fluctuations over the course of time.

While this strategy has the advantage of being riskless, its drawback is the absence of any rate of return. Since the asset is sold instantly after the purchase, the arbitrageur is not believed to have made an investment. Hence, the trade will not attract any rate of return.

Fixed-income arbitrage: this arbitrage strategy entails capitalizing on the irregularity in the interest rates of various fixed income securities such as corporate bonds, mortgage-backed securities, government bonds and municipal bonds. In this case, the arbitrageur may trade in two fixed income securities (that are similar in some measure) but will have to take opposite positions, short and long (positions) on the underpriced security and the overpriced security respectively and simultaneously.

Convertible arbitrage: the arbitrageur employing this arbitrage strategy cashes in on trading opportunities that enable him to profit from price differentials between two securities. Meanwhile, convertible security, just as the name implies, is a kind of security which is readily convertible into another security.

By extension, convertible arbitrage is one in which the arbitrageur deals in convertible security as well as the underlying common stock. The arbitrageur takes a short position in the underlying (common) stock and a long position in the convertible security simultaneously. Hedge funds are well known for adopting convertible arbitrage in their bid to exploit arbitrage opportunities.

Index arbitrage: it is in this arbitrage strategy that the arbitrageur anticipates profit-making through opportunities that let him purchase at a lower price index and sell at a higher price index. These opportunities manifest as price disparities among market indexes. Since index arbitrage may appear complex, due to the rigour of tracking indexes across exchanges, the arbitrageur employing the strategy may leverage algorithmic support by use of computers programmed to analyze a stock index and track the differential between its futures contract and spot price.

Starting Dollar Arbitrage in Nigeria: What Are the Requirements Needed?

Every business has its own startup requirements. In the case of dollar arbitrage business, the requirements needed to start the business in Nigeria are as follows:

A standard laptop or smartphone with a reliable Internet connection
An active Payoneer or PayPal account –In this post, a Payoneer account will be used. We consider the Payoneer account as the more befitting option because it comes with a free virtual account that enables you to directly receive funds in foreign currencies such as pounds, euro and the U.S. dollar
A means for generating funds for the dollar arbitrage business. This means could be a platform or medium from which you can purchase the U.S. dollar at a reduced price. In another way, it could be an online activity that will fetch you the currency. This activity could be content creation or just any digital skill that enables you to work online and earn dollars directly into your Payoneer account
Another platform –probably an exchange platform –for reconverting the dollar into naira at a higher rate. In this post, we will use Grey.co (formerly known as Aboki. Africa) for this purpose

Here is a detailed guide on how to open Grey.co Account

Getting Started with Dollar Arbitrage Business in Nigeria –Here Are the Steps

It isn’t difficult to master the right strategy for doing the dollar arbitrage business in Nigeria. But if you ever think it is difficult, this post will most likely convince you about how easy it is to master dollar arbitrage in Nigeria.

Here are the essential steps to get started with the business:

Create a PayPal or Payoneer account. This account is needed for receiving payments in dollars. Considering the reason we gave earlier, a Payoneer account would be the better option. Here is a link to find out the steps for creating a Payoneer account
Create a Grey. co account. Grey. co is notably a Nigerian currency exchange platform formerly known as Aboki.Africa. Follow the link here to learn how to create a Grey. co account
Begin to purchase the U.S. dollar at a reduced price from friends, family or trusted sellers (on exchange platforms such as Binance). You should employ your bargaining power in such a way that you can purchase dollars at a favourable rate. In this dollar arbitrage business, the Payoneer account you created will be needed for converting the dollars into GBP.

Importantly, you really need to make good use of Payoneer and Grey. co in order to succeed in this dollar arbitrage business. While Payoneer will enable you to convert your purchased dollars into the British pound, which is a more valuable currency than the U.S. dollar, Grey. co is a great platform for you to reconvert the pound into naira at a high rate.

Is Dollar Arbitrage Business Profitable in Nigeria?

You may be clueless as to deciding the best strategy that enables you to profit maximally with the dollar arbitrage business in Nigeria.

This is partly due to the fact that it may be difficult to find sellers (Nigerians) willing to sell the U.S. dollar to you at a very low rate. In a scenario whereby the seller you’re approaching bought the U.S. dollar #430 per dollar (or another rate higher than the official CBN rate), they’ll most likely want to sell to you at a higher rate so that they can make a profit. If the seller eventually sells to you at the rate of #460 per dollar, they will make a #30 profit on each dollar from the amount sold, whereas your own only chance of making a profit is to resell at a rate higher than #460 per dollar.

However, you can make a profit from your dollar arbitrage business in Nigeria without having to look for people who would buy the dollar at a higher rate. This is definitely the point where the arbitrage strategy of cashing in on exchange rate differentials between currencies (the U.S. dollar and the British pound in this case) comes into play. By extension, this would convince you that the dollar arbitrage business is profitable in Nigeria when approached with the right strategy.

How then do you profit if you don’t need to seek high-paying buyers for your dollars?

Well, you’ll make your profit by leveraging Payoneer to convert your dollar into GBP and then reconverting the GBP to naira via Grey. co. Why this works is that the British pound (GBP) is a more valuable currency than the U.S. dollar and provided you purchase your dollar at a rate lower than the exchange rate of GBP to naira on Grey. co, you’ll likely profit from converting the GBP to naira. As per Grey. co (Aboki. Africa) rates, GBP exchanges for the Nigerian naira at a price higher than #700 while the U.S. dollar exchanges for naira at a price lower than #600. What this means is that you’re likely to make a profit in excess of #100 each time you purchase a dollar (with your naira) and convert the dollar to GBP before reconverting to naira through Grey. co.

For you to understand the foregoing explanation better, below is a trading scenario:

Mr B purchases 5,000 dollars from Mr A at the rate of #415 per dollar. If Mr C (we suppose that you’re Mr C) offers to purchase the dollars from Mr B at a rate of #450 per dollar, Mr B may be willing to sell since that will earn him a profit of #35 per dollar (alternatively #175,000 from the $5,000 that will be sold to Mr C). Mr C, on the other hand, will have to fork out as much as #2,250,000 in exchange for Mr B’s $5,000.

Instead of selling the dollars directly, Mr C will –by virtue of the arbitrage strategy in this post –have to convert them to GBP via Payoneer. After the conversion (wherein the exchange rate is $1 equals 0.808544 GBP), Mr C now has 4,042.72 GBP. Since the GBP is more valuable than the USD, Mr C will likely profit by exchanging the GBP for Grey. co (formerly Aboki. Africa) for naira. $1 exchanges for #570 while 1GBP exchanges for #744 on Grey. co. This indicates a difference in excess of #150 between the exchange values of USD and GBP on Grey. co.

To reconvert your GBP (4,042.72 GBP) to naira, you’ll first have to visit your Grey. co account. Then, copy your Pounds (or GBP) Account Number. After that, you’ll have to move the 4,042.72 GBP from your Payoneer account to your Grey. co GBP account. Now that the GBP is in your Grey. co GBP account, the final thing to do is to withdraw it into your local bank account in Nigeria. Since the GBP-to-naira rate here (as obtained on Grey. co) is #744, you’ll have #3,007,783.67999.

Since you (Mr C) paid #2,250,000 to purchase $5,000 which you converted to 4,042.72 GBP and later reconverted to #3,007,783 naira (at a rate of #744 per GBP) via Grey. co, we can estimate your profit as #757,783. Although this would not be your exact profit due to the conversion fee (by Payoneer) and certain other transactional fees, you’ll still make a reasonable profit from the deal.

Conclusion

We hope you have had a full grasp of what dollar arbitrage in Nigeria entails and how you can profit from the business without the need to resell the dollar you purchased. But if you want more clarification on how dollar arbitrage is done in Nigeria, you may ask questions in the comment section below.