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What is Arbitrage? Who Benefits from Arbitrage?

Posted By mike On August 15, 2009 @ 9:57 am In Small Foot Print | 1 Comment

[1] clipped from [2] en.wikipedia.org

Arbitrage is possible when one of three conditions is met:
  • The same asset does not trade at the same price on all markets (”the law of one price“).
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  • Two assets with identical cash flows do not trade at the same price.
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  • An asset with a known price in the future does not today trade at its future price discounted at the risk-free interest rate (or, the asset does not have negligible costs of storage; as such, for example, this condition holds for grain but not for securities).
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    Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both transactions are complete. In practical terms, this is generally only possible with securities and financial products which can be traded electronically.
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