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Arbitrage

Arbitrage involves locking in riskless profits by taking offsettings positions in two or more markets simultaneously.

The most straightforward type of arbitrage is between two spot exchanges. If the price of the same asset on one exchange is higher than on the other, the arbitrageur will buy where it’s lower and sell where it’s higher.

The more sophisticated arbitrage opportunities are available with derivatives, such as forwards and futures. For instance, the arbitrageur will buy underlying on the spot exchange and book the higher selling price immediately with the futures.

Arbitrage opportunities, typically, do not last long. Arbitrageurs compete against each other and eliminate price discrepancies rather quickly.

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