Arbitrage
In economics and finance,
arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For instance, an arbitrage is present when there is the opportunity to instantaneously buy low and sell high. In principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may refer to
expected profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor, some major. In academic use, an arbitrage involves taking advantage of differences in price of a
single asset or
identical cash-flows; in common use, it is also used to refer to differences between
similar assets, as in merger arbitrage.