arbitrage investment & finance definition
A
situation in which a trader attempts to profit from minute differences in price
for the same security on different stock or futures markets. Traders that
employ this strategy are called arbitrageurs and use specially designed
computer programs to identify price discrepancies.
See arbitrage in Wall Street Words
The simultaneous purchase and sale of substantially identical assets in order to profit from a price difference between the two assets. As a hypothetical example, if General Electric common stock trades at $45 on the New York Stock Exchange and at $44.50 on the Philadelphia Stock Exchange, an investor could guarantee a profit by purchasing the stock on the Philadelphia Stock Exchange and simultaneously selling the same amount of stock on the NYSE. Of course, the price difference must be sufficiently great to offset commissions. Arbitrage may be employed by using various security combinations including stock and options and convertibles and stock. See also
basis trading,
risk arbitrage.
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