arbitrage

Was chatting with our summer interns and came up with a pretty good example to help explain arbitrage.
Say you're looking to buy a book. On Amazon.com the book's price is USD10. On Amazon.co.jp the book's price is JPY1500, and the used market shows a buyer willing to pay JPY1300 for a used copy.
Assuming an exchange rate of 100JPY/USD, then theoretically you simultaneously buy the book on Amazon.com for ten bucks and sell it used on Amazon.co.jp for thirteen, making a nice three dollar profit. That's arbitrage (with an FX component.)
Of course, nothing is that simple. First of all, if shipping from Amazon.com costs four dollars, then you actually loose a dollar on the transaction.
Or, if the exchange rate moves to 110, then your profit drops to not even two bucks. In fact, if the exchange rate moves to more than 130, your profit is wiped out.
And markets naturally seek to eliminate arbitrage opportunities. So if a whole bunch of folks buy the book on Amazon.com and sell it used in Japan, the used market on Amazon.co.jp gets flooded and the price drops. At our original FX rate of 100, if the price of a used book in Japan drops to JPY1000, the arbitrage opportunity evaporates. (Inversely, with everyone buying the book on Amazon.com, the price could rise up to USD13, and then again the arbitrage opportunity is zeroed.)
Also, as people buy more books on Amazon.com, they need US dollars to pay. Demand for the USD goes up, and a dollar gets more expensive relative to other currencies. Folks holding dollars can sell them for more than they could before, demanding say 130 yen for every dollar instead of our original 100 yen. At 130JPY/USD once again the arbitrage opportunity disappears.