In business economics, finance and sports, arbitrage is the concept of taking advantage of a cost difference between 2 or more markets: striking a mixture of matching deals that capitalize upon the asymmetry, the gain being the differences between the market prices.
When utilized by academics, an arbitrage can be a transaction that concerns no bad cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it’s the probability of a risk-free profit at zero cost.
In principle as well as in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may make reference to expected profit, though losses may arise, and in practice, there are always risks in arbitrage, some minor (such as change of prices decreasing income), some major (which include devaluation of your currency or derivative).
In academic use, an arbitrage involves benefiting from variations in price of a single asset or identical cash-flows; in common use, it is usually employed to make reference to differences between similar assets (relative value or convergence trades), such as merger arbitrage.
People who engage in arbitrage are called arbitrageurs such as a bank or brokerage firm. The phrase is principally ascribed to trading in financial instruments, including bonds, futures, derivatives, commodities and currencies.
Specific sport arbitrage has also recently become possible due to the use of online bookmakers supplying widely diverging odds on sporting events establishing situations where it is easy to place bets that cannot lose.
Although this involves bookmakers it’s not at all gambling as there isn’t any risk to the initial stake which cannot be lost. This is whats called ‘Arbitrage Betting‘ or ‘Matched Betting‘
Arbitrage is just not simply the act of buying a product within a market and selling it in another for a larger price at some later time. The transactions must occur simultaneously in order to avoid exposure to market risk, or the risk that prices may change on a single market before both trades are complete.
In practical terms, this is generally only possible with securities and financial products which might be traded electronically, and even then, when each leg of your trade is implemented the values in the market could have moved.
Missing one of the legs of the trade (and subsequently having to trade it immediately after at a worse price) is called ‘execution risk’ or more specifically ‘leg risk’.
“True” arbitrage necessitates that there be no market risk concerned.
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