Risk-free Profit Strategies

Working in the shadow of traders, I often overhear some of their money making strategies. So yesterday at the Washington Zoo, I spotted a perfect money making opportunity reminiscent of traders' strategies. There was a souvenir penny-engraving machine that presses souvenir pennies for 50 cents plus the one penny. Next to it was a machine that makes change for one and five dollar bills. Given a dollar bill, the machine returns 4 quarters and 2 pennies. Given a 5 dollar bill, the machine returns 20 quarters and 10 pennies.

Whoa!!! That's a mega opportunity the size of a dump truck. In rates and currency markets, if there is even an opportunity to exploit risk free arbitrages of a single penny, traders would press this opportunity to the full- using leverage (borrowed funds via repos).

I quickly exchanged two five-dollar bills for a 20 cents risk-free profit. There was a small risk that the machine might run out of quarters (liquidity risk) which would've sunk my profits.

However, I lost my hard-earned 20 cents gains immediately when my daughter asked to get a drink from the neighboring soda machine.