Menu
Contact us
/
Financial Glossary
/
Arbitrage
What is arbitrage?
Arbitrage is a trading strategy that involves taking advantage of price differences for the same asset in two or more markets. Traders, or arbitrageurs, buy the asset at a lower price in one market and sell it at a higher price in another, capitalizing on the price discrepancy.
Arbitrate strategies rely on identifying temporary inefficiencies in market pricing. While arbitrage aims to capitalize on these differences, it can also contribute to market efficiency by helping align prices across markets. These transactions must occur simultaneously to minimize the risk of the price changing before both transactions are complete.
Arbitrage opportunities often arise due to factors such as supply and demand imbalances, variations in currency exchange rates, transaction costs, or regulatory restrictions. For example, a stock might trade at a lower price on one exchange compared to another. Arbitrageurs act quickly on these opportunities by buying from the lower-priced exchange and selling on the higher-priced one to capitalize on the disparity.
The three conditions required for arbitrage to take place are:
The same asset is priced differently across two or more markets
Two assets with identical cash flows are not trading at the same price
An asset with a known future price is not trading today at its discounted value, based on risk-free interest rates