Arbitrage

Arbitrage involves taking advantage of price differences in different markets by simultaneously buying and selling the same asset. This practice ensures that prices remain consistent across markets, contributing to market efficiency. Arbitrage opportunities arise when an asset is priced differently in two markets, allowing traders to buy low in one market and sell high in another, thereby earning a risk-free profit.

Arbitrage can occur in various forms, including spatial arbitrage (different locations), temporal arbitrage (different times), and statistical arbitrage (based on statistical models). This strategy is widely used in financial markets, such as stocks, bonds, currencies, and commodities. While pure arbitrage offers risk-free profits, it requires sophisticated technology and rapid execution to exploit fleeting opportunities.

1. A trader buying a stock on the New York Stock Exchange and simultaneously selling it on the London Stock Exchange at a higher price.
2. Currency arbitrage involving the purchase of a currency in one market and selling it in another where the exchange rate is more favorable.
3. Commodity arbitrage, such as buying gold in one market and selling it in another where prices are higher.