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Arbitrage Basics
 
Arbitrage

Arbitrage involves the simultaneous purchase and sale of an asset in order to profit from a temporary price differential, usually taking place on different exchanges or marketplaces. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, “a risk-free profit”. If you want to replace the returns from your idle funds in fixed deposits with higher yielding returns, arbitrage is a good risk free investment option for you.

A person who engages in arbitrage is called an arbitrageur. The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives, commodities and currencies.

If the market prices do not allow for profitable arbitrage, the prices are said to constitute an arbitrage equilibrium or arbitrage free market.

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