What does arbitrage mean?
Share
Lost your password? Please enter your email address. You will receive a link and will create a new password via email.
Please briefly explain why you feel this question should be reported.
Please briefly explain why you feel this answer should be reported.
Please briefly explain why you feel this user should be reported.
Arbitrage: Definition and Explanation
Arbitrage is a financial strategy that involves simultaneously buying and selling the same asset or closely related assets in different markets to exploit price differences for profit. The core idea of arbitrage is to take advantage of market inefficiencies, where the same asset is priced differently in separate markets.
Price Discrepancies: Arbitrageurs identify assets that are undervalued in one market and overvalued in another. They buy the asset where it is cheaper and sell it where it is more expensive, capitalizing on the price discrepancy.
Risk-Free Profit: Ideally, arbitrage is considered a risk-free operation, as the transactions are made simultaneously. The profit is the difference between the buying and selling prices, minus transaction costs.
Market Efficiency: Arbitrage plays a crucial role in financial markets by promoting market efficiency. As arbitrageurs exploit price discrepancies, their actions help to align prices across different markets, reducing or eliminating the price differentials.
Arbitrage is commonly used in currency exchange, securities, commodities, and other financial markets. Advanced technology and high-speed trading systems have made arbitrage more competitive, often requiring sophisticated algorithms to identify profitable opportunities quickly.