Arbitrage is a technique used to take advantage of differences in price in substantially identical assets across different markets. An arbitrageur will buy foreign currency, bonds, stocks and commodities cheap in one market to sell more expensively in another. For example, if wheat is cheaper in Chicago than in London he will buy in Chicago and sell in London. Similarly, if the same stocks trade at 100p on the New York Stock Exchange and 101p in Tokyo, he will buy the first and sell the second. A successful arbitrage trade like this will see no net cash flow and carries no risk of loss. As it exploits the inefficiencies of current prices, it also helps establish equilibrium in markets by removing them.
In a series of three short videos, Merryn Somerset-Webb talks to Hugh Hendry, manager of the Eclectica hedge fund, about everything from China to the US, Europe, and Japan.
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On this day in 1973 Opec, the oil price cartel, more than doubled the price of oil from $5.12 a barrel to $11.65.