ARBITRAGE IN VIETNAM’S FINANCIAL MARKET
Nguyen Thi Anh
1. Introduction
Arbitrage is one of the core strategies in modern finance and a mechanism that ensures markets operate efficiently, with prices reflecting true value. It refers to simultaneously buying and selling the same asset or related assets across different markets to profit from temporary price discrepancies.
In theory, arbitrage eliminates pricing inefficiencies and enforces the Law of One Price (Luật một giá), which states that identical assets cannot trade at different prices in the absence of transaction costs and information barriers. In practice, the existence of transaction costs, technical limits, and legal constraints creates temporary arbitrage opportunities—especially in emerging markets such as Vietnam.
Over the past two decades, Vietnam’s financial market has undergone rapid liberalization—from the establishment of the stock market in 2000, to the launch of financial derivatives in 2017, and deeper integration into regional and global finance. This transformation has created fertile ground for arbitrage in equities, indexes, bonds, interest rates, and foreign exchange, as well as between spot and futures markets.
2. Theoretical Framework and Classification of Arbitrage
2.1. Concept
Arbitrage refers to the simultaneous purchase and sale of an asset or related financial instruments to exploit price differences with minimal risk. According to Eugene Fama’s (1970) Efficient Market Hypothesis, arbitrage is the driving force that pushes markets toward equilibrium—investor actions correct mispricing and restore efficiency.
In reality, arbitrage is rarely completely risk-free. Market volatility, transaction delays, funding costs, and liquidity constraints introduce a degree of uncertainty, giving rise to what is known as risk arbitrage—a low-risk but not riskless activity.
2.2. Major Types of Arbitrage
- Spot–Futures Arbitrage
Investors buy an asset in the spot market and simultaneously sell its futures contract when the futures price exceeds the fair value (after accounting for financing costs). Conversely, they buy futures and sell the spot asset when the futures price is undervalued.
- Cross-Market Arbitrage
When the same stock trades on two exchanges (for instance, HOSE and HNX, or HOSE and UPCoM) at different prices, traders buy from the cheaper market and sell on the higher-priced one.
- Index Arbitrage
Exploiting discrepancies between the value of an index and the price of its futures contract—such as between the VN30 Index and VN30 Futures.
- Interest-Rate Parity Arbitrage
When the difference between domestic and foreign interest rates does not align with expected forward exchange rates, investors can borrow in a low-rate currency, invest in a high-rate currency, and hedge exchange-rate risk through forward contracts.
- Currency (Triangular) Arbitrage
If exchange rates between currency pairs violate the triangular parity condition, traders can execute a series of conversions to lock in near-risk-free profit.
- Bond Arbitrage
Exploiting yield differentials between bonds with similar maturities or credit quality by buying undervalued and selling overvalued securities.
- Event-Driven or Merger Arbitrage
Based on corporate events—such as mergers, acquisitions, or IPOs—investors buy undervalued shares of the target firm and sell shares of the acquiring company at higher market prices.
3. Arbitrage Practices in Vietnam’s Financial Market
3.1. Arbitrage in the Equity Market
Vietnam has two main exchanges as HOSE (Ho Chi Minh City) and HNX (Hanoi) plus the UPCoM system for unlisted public companies. Some firms have dual listings or move between exchanges, causing temporary price gaps due to differences in liquidity, investor sentiment, and information flow.
Between 2020 and 2023, several UPCoM-listed stocks traded below their intrinsic or future HOSE listing value, creating opportunities for cross-exchange arbitrage. However, restrictions on holding periods and lengthy listing-transfer procedures make it difficult for retail investors to exploit such gaps effectively.
3.2. Spot–Futures Arbitrage
The launch of VN30 Index Futures in 2017 marked a milestone for arbitrage in Vietnam. Financial institutions began implementing arbitrage strategies between the VN30 spot index and VN30F1M futures contracts.
When the futures price exceeds its theoretical value (calculated as spot × (1 + risk-free rate – dividend yield)), traders sell the futures and buy the underlying VN30 stocks. If the futures price is below fair value, they buy the futures and short or sell the underlying portfolio.
Large securities firms—such as SSI, VPS, and HSC—use algorithmic trading systems to detect these small discrepancies. However, profit margins are thin (typically 0.05–0.2%), and transaction fees, margin requirements, and slippage often erode returns, limiting arbitrage scale in Vietnam.
3.3. Interest-Rate and Foreign-Exchange Arbitrage
In Vietnam’s money market, differences between VND and USD interest rates occasionally deviate from the interest-rate parity condition. When the domestic–foreign rate spread does not align with forward exchange rates, firms can borrow in USD abroad, sell it forward for VND, and earn the interest differential.
The State Bank of Vietnam (SBV) closely monitors these flows to prevent speculative capital movements. Nevertheless, given Vietnam’s high trade and FDI volumes, exporters and importers often use FX arbitrage to hedge currency risk and optimize cash flows.
3.4. Bond and Interbank Rate Arbitrage
Vietnam’s government bond market has expanded rapidly, but the yield curve occasionally shows inconsistencies. Banks and insurance companies may engage in bond arbitrage, buying undervalued long-term bonds while selling or repoing short-term ones when the curve inverts.
Similarly, in the interbank market, short-term discrepancies between overnight, one-week, and one-month interest rates allow banks to perform carry-trade arbitrage, borrowing at lower maturities and lending at higher ones. However, profit margins are minimal and depend heavily on funding costs and credit limits.
4. Models, Opportunities, and Strategies for Arbitrage in Vietnam
4.1. Theoretical Pricing Model for Spot–Futures Arbitrage
The fair value of a futures contract is defined as:
Where: F: futures price; S: spot price of the underlying asset; r: risk-free interest rate; q: dividend yield of the asset; T: time to maturity
- If Fmarket > Ffair: sell futures, buy spot.
If Fmarket < Ffair: buy futures, sell spot.
In Vietnam, the VN30F1M futures price often deviates slightly from theoretical value due to funding costs, margin differences, and investor sentiment, providing short-term arbitrage opportunities.
4.2. Dual-Listing (Cross-Exchange) Arbitrage
Some state-owned or large-cap enterprises have shares listed on both HNX and HOSE (or on HOSE and UPCoM). Because of variations in liquidity and daily price-limit bands, price gaps of 1–3% sometimes appear, enabling “buy-low, sell-high” strategies. However, to execute efficiently, investors need large volumes and fast order execution (T+2 settlement reduces flexibility).
4.3. International–Domestic Index Arbitrage
Although Vietnam does not yet allow unrestricted short-term capital movement, some foreign funds employ index arbitrage between the MSCI Frontier Market Index and Vietnam’s VN30 Index. Changes in Vietnam’s weighting within global indexes often cause delayed price reactions, producing temporary arbitrage opportunities.
4.4. Technology-Driven and Algorithmic Arbitrage
The emergence of AI and algorithmic trading still in its infancy in Vietnam has enabled certain securities firms to identify tiny discrepancies in derivative pricing. For instance, if VN30F1M futures deviate from fair value by 0.1%, automated systems can trigger arbitrage trades. Yet high requirements for infrastructure, latency, and real-time data processing remain major obstacles.
4.5. Factors Affecting Arbitrage Opportunities
- Liquidity: Low liquidity in either the spot or futures market prolongs mispricing but limits execution capacity.
- Transaction Costs: Brokerage fees, taxes, and margin interest can erase small arbitrage gains.
- Regulatory Constraints: Position limits, foreign ownership caps, and capital-control measures hinder cross-border arbitrage.
- Information Speed: Delays in data dissemination and order matching can cause mispricing to vanish before execution.