What is meant by Arbitrage : is a financial and economic concept that refers to the practice of taking advantage of price differences for the same asset, security, or commodity in different markets or locations to make a risk-free profit.
It involves exploiting discrepancies in prices or values to buy low and sell high, thereby generating profit without any net investment or exposure to risk.
Here’s a more detailed explanation of arbitrage:
- Price Differences: Arbitrage possibilities rise up when the identical asset, together with a inventory, bond, commodity, or forex, is trading at specific prices in specific markets or at distinct times.
- Risk-Free Profit: The essence of arbitrage is that it should yield a risk-free profit. By buying low and selling high (or vice versa), arbitrageurs can earn a profit without exposing themselves to market risks. They essentially eliminate the possibility of loss if executed correctly.
- Risk-Free Profit: The essence of arbitrage is that it should yield a risk-free profit.
- Efficiency in Markets: Arbitrage activities help to make markets more efficient.
There are several types :-
- Spatial Arbitrage: Exploiting price differences in the same asset across different geographic locations.
- Temporal Arbitrage: Exploiting fee variations for the identical asset over the years, including taking advantage of futures contracts’ pricing relative to identify expenses.
- Statistical Arbitrage: Utilizing statistical models to identify mispriced assets and executing trades based on the model’s signals.
In is about capitalizing on price discrepancies in different markets or over time to secure risk-free profits.