What is arbitrage?
Arbitrage means trading of same product in different markets. The traders practicing arbitrage are known as arbitrators. They buy a product at low price from one market and simultaneous sell the same in other market at high price.
The practice of arbitrage differs with the type of product trading. The product can be stocks, currencies or commodities. In forex currency market an arbitrator usually buys currencies from one country and sells them in another count with slight difference in exchange rate. In futures market arbitrators usually buy short-term delivery contracts and sell longer term delivery contracts. Some arbitrators buy certificate of deposits from one country/institution at lower value and invest the same in other country/institution for higher face value.
The term “risk arbitrage” came in to form in 1980s. In risk arbitrage the arbitrators find companies going to proposed takeovers (merges/acquisitions) and buys large amounts of its stocks in believe that the takeover will certainly raise the stock price. Riskless arbitrage is the usual one described in beginning.
The practice of arbitrage differs with the type of product trading. The product can be stocks, currencies or commodities. In forex currency market an arbitrator usually buys currencies from one country and sells them in another count with slight difference in exchange rate. In futures market arbitrators usually buy short-term delivery contracts and sell longer term delivery contracts. Some arbitrators buy certificate of deposits from one country/institution at lower value and invest the same in other country/institution for higher face value.
The term “risk arbitrage” came in to form in 1980s. In risk arbitrage the arbitrators find companies going to proposed takeovers (merges/acquisitions) and buys large amounts of its stocks in believe that the takeover will certainly raise the stock price. Riskless arbitrage is the usual one described in beginning.
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