ARBITRAGE - WHAT IS ARBITRAGE - DEFINITION OF ARBITRAGE IN FINACE AND ECONOMICS - ARBITRAGE is essentially buying in one market and at the same time selling in another, making a profiting from a momentary difference
Arbitrage is essentially buying in one market and at the same time selling in another, making a profiting from a momentary difference. This is regarded risk-free profit for the investor or trader.
Suppose that you are able to buy a DVD for $10 in Tallahassee, Florida, but in Seattle, Washington, the DVD is selling for $20. If you are able to buy the DVD in Florida and sell it in the Seattle market, you can profit from the difference without any risk because the higher price of the DVD in Seattle is guaranteed.
In light of the stock market, traders usually try to exploit arbitrage opportunities. As an example, a trader may buy a stock on a foreign exchange where the price has not yet attuned for the constantly fluctuating exchange rate.
The price of the stock on the foreign exchange is, for this reason, undervalued compared to the price on the local exchange, andthe trader makes a profit from this difference.