Encyclopedia of Business | Arbitrage

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Arbitrage, within the context of financial markets, refers to the practice of trading on, and profiting from, a current or expected inconsistency in the pricing of an asset or group of assets. For example, consider a dual listed stock selling for $30 on one stock exchange and $40 on another. To make a guaranteed profit one need only buy the security for $30 on one exchange and sell it for $40 on the other. This is an example of an immediate arbitrage opportunity. An arbitrage opportunity is created when an asset has two different expected returns. However, apparent arbitrages must be examined carefully, to make sure that the price differential is an actual mispricing and does not represent a risk premium or compensation for a perceived utility.

Arbitrage is very closely related to the concept of market...