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Definition: Arbitrage

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. 


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