Glossary - Arbitrage
Arbitrage refers to the simultaneous purchase and sale of the same or similar securities, commodities, or foreign exchange in different markets to profit from unequal prices. It exploits short-lived variations in the price of identical or similar financial instruments in different markets or in different forms.
Also known as
- Riskless profit
- Arbitrage trading
Use cases examples
- Financial Statement: The company engaged in arbitrage by purchasing stock in Company A from the New York Stock Exchange and simultaneously selling it on the London Stock Exchange for a higher price, leading to a profit reflected in this year's financial statement.
- Investor Report: Our fund capitalized on an arbitrage opportunity in the gold market, buying futures contracts in one market at a lower price and selling them at a higher price in another market, as detailed in this quarter's investor report.
Considerations for investors
- Investors should evaluate the expertise and track record of entities engaging in arbitrage to ensure they can effectively manage the associated risks.
- Due diligence is essential to understand the strategies used in arbitrage and their alignment with the investor's overall investment objectives and risk tolerance.
Considerations for founders
- Founders should understand the legal and tax implications of engaging in arbitrage, particularly in different jurisdictions.
- It is crucial to assess the risks associated with exchange rate fluctuations and the potential impact on arbitrage strategies.
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