Arbitrage
Arbitrage is the practice of taking advantage of a price difference between two or more markets. It involves buying a commodity, currency, or security in one market and simultaNeously selling it in another at a higher price, thus profiting from the discrepancy. Arbitrage opportunities typically exist for a very short time and require quick execution to be profitable.
Examples:
- Currency Arbitrage: A trader buys Euros at a lower rate on one exchange and sells them at a higher rate on another exchange.
- Stock Arbitrage: An investor purchases Shares of a company on one Stock exchange where the price is lower and simultaNeously sells the same Shares on another exchange where the price is higher.
- Commodity Arbitrage: A trader buys gold in a market where the price is lower and sells it in a different market where the price is higher.
Cases:
- Triangular Arbitrage: This involves three currencies and takes advantage of discrepancies in the Exchange Rates between them. For instance, if the Exchange Rates between USD, EUR, and GBP create a cycle that allows for a profit, a trader can convert USD to EUR, then EUR to GBP, and finally GBP back to USD.
- Spatial Arbitrage: This occurs when the same Asset is priced differently in different locations. For example, if a barrel of oil is cheaper in one country due to local market conditions, it can be purchased and then sold in another country where the price is higher.