It stands for borrower arbitrage; a type of one-way arbitrage which capitalizes on violations to the law of one price (LOP) for borrowing rate (ask). As the name implies, in borrower arbitrage (BA), a trader seeks to finance an investment in or a funding requirement at the cheapest cost (where arbitrage gains are reflected in minimized borrowing costs). A borrower-arbitrageur may consider borrowing directly in a given currency or indirectly in another currency and then converting the funds to the original currency at the spot exchange rate. However, the latter position may involve an exchange rate risk (arising from currency conversion) which can be mitigated at maturity date of the loan by taking a position in a forward contract (i.e., selling, on a forward basis, the same amount in the original currency).
Finance
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