As Justin Wolfers noted, maybe there are today bigger practical obstacles to prediction market arbitrage.

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Legal restrictions for US traders on foreign prediction exchanges (BetFair, etc.)-

Transaction fees (you would need to operate on 2 exchanges)-

Currency risks and cost for hedging on that.

Eric Crampton (a Canadian exiled in New Zealand) says he has managed to turn a buck, though, by arbitraging between InTrade and iPredict New Zealand. He also makes 2 theoretical points. Go read it.

With regard to the 2008 US elections, both Justin Wolfers and Robin Hanson implied that BetFair is not as predictive as it should be.

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Previously: About Justin Wolfers&#8217-s column

Justin Wolfers&#8217- Freakonomics post (which suggests that BetFair would have a better predictive power if US traders could use it).

Is this a sign that the BetFair prediction exchange and the BetFair blog are not the best sources of information on the 2008 US presidential elections?

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– the latest InTrade predictions

– Emile Servan-Schreiber&#8217-s post on market arbitrage

Problem 17: Prediction Markets – USMA D/Math Problem of the Week – Submission Deadline: April 3, 2008 at 1600

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And we have a winner, Chris Hibbert of Zocalo:

You can buy Giuliani on Q2 for .12 and sell Giuliani on Q1 for .52, and have a combination that will pay $1 no matter what for an outlay of .64. We want to take that .36 gain and turn it into $100. 100 / .36 = 277.777&#8230-

So we&#8217-ll buy 278 shares of each.The 278 shares cost 278 * (.12 + .52), which is 177.92. Whatever happens, you&#8217-ll win $278, which puts you ahead by $100.