what is arbitrage 
arbitrage is the simultaneous purchase and sale of the same or similar asset in different markets in order to profit from tiny differences in the asset s listed price it exploits short lived variations in the price of identical or similar financial instruments in different markets or in different forms arbitrage exists as a result of market inefficiencies and it both exploits those inefficiencies and resolves them understanding arbitragearbitrage can be used with any asset type but occurs most commonly in liquid markets such as commodity futures well known stocks or major forex pairs these assets can often be transacted in multiple markets at once this creates rare opportunities for purchasing in one market at a given price and simultaneously selling in another market at a higher price in principle the situation creates an opportunity for a risk free profit for the trader however in today s modern markets these circumstances could indicate a hidden cost not immediately apparent to the arbitrageur arbitrage provides a mechanism to ensure that prices do not deviate substantially from fair value for long periods of time with advancements in technology it has become extremely difficult to profit from pricing errors in the market many traders have computerized trading systems set to monitor fluctuations in similar financial instruments any inefficient pricing setups are usually acted upon quickly and the opportunity is eliminated often in a matter of seconds examples of arbitrageas a straightforward example of arbitrage consider the following the stock of company x is trading at 20 on the new york stock exchange nyse while at the same moment it is trading for 20 05 on the london stock exchange lse a trader can buy the stock on the nyse and immediately sell the same shares on the lse earning a profit of 5 cents per share the trader can continue to exploit this arbitrage until the specialists on the nyse run out of inventory of company x s stock or until the specialists on the nyse or the lse adjust their prices to wipe out the opportunity types of arbitrage include risk retail convertible negative statistical and triangular among others a trickier example can be found in forex or currency markets using triangular arbitrage in this case the trader converts one currency to another converts that second currency to a third bank and finally converts the third currency back to the original currency suppose you have 1 million and you are provided with the following exchange rates usd eur 1 1586 eur gbp 1 4600 and usd gbp 1 6939 with these exchange rates there is an arbitrage opportunity from these transactions you would receive an arbitrage profit of 1 384 assuming no transaction costs or taxes 