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Arbitrage Definition

Arbitrage is an investment strategy in which an investor purchases and sells an asset in separate marketplaces at the same time in order to profit from a price difference.

Types of Arbitrage

  1. Pure Arbitrage
    Pure arbitrage is when an investor purchases and sells a security in multiple marketplaces at the same time to benefit from a price difference.
  2. Merger Arbitrage
    Merger arbitrage is a sort of arbitrage that occurs when two publicly traded companies combine.
  3. Convertible Arbitrage
    Convertible arbitrage is a type of arbitrage involving convertible bonds, which are also known as convertible notes or convertible debt.

What is an example of arbitrage?

On the NYSE, a mobile company’s stock is trading for $25. The Shanghai Stock Exchange also trades it at the exact same time for $25.50. The arbitrageur purchases the stock from the NYSE and instantly trades it on the Shanghai market for a 50-cent profit.

What is the importance of arbitrage?

  • Arbitrage traders improve the effectiveness of the financial markets while generating profits. Price discrepancies between comparable or identical assets narrow as they buy and sell.
  • Arbitrage contributes to the robustness and efficiency of the financial markets. For instance, equities would trade at various prices in various markets if there were no arbitrageurs in the market. This would provide a select group of merchants with an unfair advantage.
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