arbitrage
AHR-bi-trahzh
/ˈɑːrbɪtrɑːʒ/
The simultaneous purchase and sale of an asset in different markets to profit from a price difference.
Theoretically risk-free profit derived from temporary market inefficiencies across separate trading venues.
The story behind the word. Borrowed from French 'arbitrage' (judgment by an arbiter). In 18th-century French commerce, an 'arbitrage' was the calculation made by an arbiter to determine the most favorable exchange rates between international monetary hubs.
Word relationships
- spread trading: Spread trading involves speculating on price movements, whereas arbitrage seeks to lock in immediate riskless price differentials.
- directional trading: Directional trading relies on predicting overall market movement rather than exploiting structural price discrepancies.
Commonly confused with
- arbitration: Arbitration is a legal process for settling disputes out of court; arbitrage is a financial strategy exploiting price differences.
Word family
- arbitrageur (noun): A trader who engages in arbitrage.
- arbitrage (verb): To engage in simultaneous buying and selling to profit from price differences.
Collocations
- arbitrage opportunity
- triangular arbitrage
- spatial arbitrage
- arbitrage trader
Idioms & expressions
- free lunch
- picking up pennies in front of a steamroller
Example sentences
- "Arbitrage opportunities rapidly disappear as automated algorithms buy in lower-priced exchanges and sell in higher-priced ones." Financial Economics
- "Traders exploited spatial arbitrage by purchasing gold in London and immediately selling it at a premium in New York." Cross-Market Trading
- "Fragmented global cryptocurrency liquidity creates frequent arbitrage opportunities between decentralized and centralized exchanges." Cryptocurrency Markets
Memory hook
ARBITRAGE = AN ARBITER comparing two prices to pick the profit. Profiting from price gaps between markets.
When not to use
Do not confuse with standard long-term investing; arbitrage requires exploiting price discrepancies across different venues simultaneously.
Fun facts
- The 'Kimchi Premium' was a famous crypto arbitrage gap where Bitcoin traded up to 30% higher on South Korean exchanges due to capital controls.
Related words
Explore more words
Derivative, Hedging, simultaneous, insider trading, broker, arbitration
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