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.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
What is the 25x retirement rule and does it work?The 25x retirement rule has been around for decades but many experts question if it is a suitable strategy
-
When is the self-assessment tax return deadline?If you are self-employed, rent out a property or earn income from savings or investments, you may need to complete a self-assessment tax return. We run through the deadlines you need to know about
