Arbitrage

AAA

DEFINITION of 'Arbitrage'

The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.

INVESTOPEDIA EXPLAINS 'Arbitrage'

Given the advancement in technology it has become extremely difficult to profit from mispricing in the market. Many traders have computerized trading systems set to monitor fluctuations in similar financial instruments. Any inefficient pricing setups are usually acted upon quickly and the opportunity is often eliminated in a matter of seconds.

Arbitrage is a necessary force in the financial marketplace. To understand more of this concept, read Trading The Odds With Arbitrage.

VIDEO

RELATED TERMS
  1. Currency Arbitrage

    A forex strategy in which a currency trader takes advantage of ...
  2. Cash-And-Carry-Arbitrage

    A combination of a long position in an asset such as a stock ...
  3. Municipal Bond Arbitrage

    A strategy that consists of building a portfolio of tax-exempt ...
  4. Conversion Arbitrage

    An options trading strategy employed to exploit the inefficiencies ...
  5. Arbitrage-Free Valuation

    1. The theoretical future price of a security or commodity based ...
  6. Efficient Market Hypothesis - EMH

    An investment theory that states it is impossible to "beat the ...
Related Articles
  1. Credit Card Arbitrage: Free Money Or ...
    Credit & Loans

    Credit Card Arbitrage: Free Money Or ...

  2. The International Fisher Effect: An ...
    Economics

    The International Fisher Effect: An ...

  3. Arbitrage Squeezes Profit From Market ...
    Options & Futures

    Arbitrage Squeezes Profit From Market ...

  4. The Roles Of Traders And Investors In ...
    Investing Basics

    The Roles Of Traders And Investors In ...

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center