#TradingStrategyMistakes An arbitrage strategy is a trading strategy that aims to exploit price differences of the same or very similar financial instruments across different markets or forms. The idea is to buy low in one market and sell high in another simultaneously, locking in a risk-free profit.
Here are several common types of arbitrage strategies:
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1. Spatial (or Geographical) Arbitrage
Description: Exploiting price differences for the same asset in different markets or exchanges.
Example: Buying Bitcoin for $29,800 on Coinbase and simultaneously selling it for $30,000 on Binance.
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2. Statistical Arbitrage
Description: Uses mathematical models to find mispricings between related securities.
Tools: Mean reversion models, pairs trading, machine learning.
Example: If stock A and stock B historically move together, but A drops while B rises, you short B and go long A, expecting convergence.
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3. Triangular Arbitrage (Forex)
Description: Takes advantage of discrepancies between three foreign exchange rates.
Example: USD → EUR → GBP → USD. If the implied rate differs from the direct rate, a profit can be locked in.
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4. Merger Arbitrage
Description: Involves buying the stock of a company being acquired and shorting the acquiring company.
Risk: The deal may fall through.
Example: Company A is buying Company B at $50/share, but B is trading at $48 due to uncertainty. Buy B, short A.
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5. Convertible Arbitrage
Description: Buy a company's convertible bonds and short its stock.
Goal: Profit from mispricing between the convertible bond and the underlying equity.
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6. Cryptocurrency Arbitrage
Types:
Exchange arbitrage: Price difference between exchanges.
Cross-border arbitrage: Differences due to capital controls or demand/supply
