Posted in Finance, Accounting and Economics Terms, Total Reads: 1359
In financial literature, an arbitrage simply refers to a risk-less profit. It is a practice which exploits any difference between the prices of the same contract/commodity in two different markets. An arbitrage generally does not exploit the difference in prices over time rather in two different markets at the same time.
An arbitrage essentially involves a zero probability of a negative cash flow with at least one positive cash flow.
In equilibrium, markets essentially do not allow for arbitrage opportunities.
If there is a difference between the prices of a stock on two different exchanges, an investor can earn risk-less profit by purchasing the stock from the exchange where the price is low and immediately selling it on the exchange with a higher price resulting in the profit of the price-differential.