Arbitrage is a financial strategy or technique that involves taking advantage of price discrepancies in various markets to generate a profit with little or no risk. It is a process where an individual or an entity seeks to exploit the differences in prices of a particular asset, security, or financial instrument in different markets.
In essence, arbitrage occurs when an investor buys an asset at a lower price in one market and simultaneously sells it at a higher price in another market, thereby profiting from the price discrepancy. This strategy relies on the assumption that markets are not always perfectly efficient and that price disparities can exist temporarily.
Arbitrage can be performed in various financial markets, such as stocks, commodities, currencies, or derivatives, and may involve different techniques, including spatial, temporal, or statistical arbitrage. Spatial arbitrage takes advantage of price differences in different geographic locations, temporal arbitrage exploits variations in prices over time, and statistical arbitrage is based on statistical models and quantitative analysis.
Arbitrage can be conducted by professional traders, hedge funds, or financial institutions, who have the necessary resources, access, and expertise to identify and execute such opportunities quickly. However, due to advances in technology and increased market transparency, arbitrage opportunities have become increasingly rare and fleeting.
Overall, arbitrage is a financial strategy that seeks to profit from price differences across markets, aiming to capitalize on inefficiencies and restore equilibrium in the prices of assets.
