Evidence on the profitability of credit card arbitrage

Authors

  • Terrance Jalbert College of Business and Economics, University of Hawaii at Hilo
  • Jonathan Stewart Abilene Christian University, Abilene, TX
  • Mercedes Jalbert The Institute for Business and Finance Research, Hilo, HI

DOI:

https://doi.org/10.61190/fsr.v17i1.4904

Keywords:

Consumer debt, Bank profitability, Arbitrage opportunities, Credit cards

Abstract

Financial institutions frequently offer low introductory interest rates to entice individuals to open and use credit accounts with their firm. This paper examines the possibility of earning arbitrage profits by taking advantage of these special offers. We develop a formula to measure the profit potential from undertaking credit card arbitrage and identify conditions conducive to profitable and unprofitable arbitrage. In addition, we examine the sensitivity of the arbitrage transaction to changes in interest rates, interest rate levels, and fees. Finally, we examine the impact of credit card arbitrage on the credit rating of the arbitrageur.

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Published

2008-03-30

Issue

Vol. 17 No. 1 (2008): FSR Spring 2008

Section

New Original Submission

License

Copyright (c) 2008 Academy of Financial Services

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How to Cite

Evidence on the profitability of credit card arbitrage. (2008). Financial Services Review, 17(1), 31-47. https://doi.org/10.61190/fsr.v17i1.4904