Arbitrage Definition & Meaning | Financial Term | CSIMarket
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Glossary

Arbitrage

Financial Term

Arbitrage is a financial strategy that takes advantage of price differences between markets, assets, or securities. It involves buying an asset in one market and selling it in another simultaneously, profiting from the price difference.

In the financial industry, arbitrage is commonly used by traders, hedge funds, and investment companies to generate profits with minimal risk. They look for market inefficiencies and price discrepancies that create opportunities for arbitrage trades.

There are different types of arbitrage, including:

- Exchange arbitrage: taking advantage of price differences between the same asset in different exchanges.
- Merger arbitrage: buying shares of a company targeted for acquisition and selling after the deal closes at the higher market price.
- Fixed income arbitrage: exploiting price differences between fixed-income securities, such as bonds or treasury bills.
- Triangular arbitrage: profiting from exchange rate discrepancies among three currencies.

Arbitrage requires fast execution and sophisticated trading algorithms that can identify and capitalize on opportunities quickly. The use of technology and automation has made arbitrage more prevalent in the financial industry, but it also contributes to market efficiency by closing pricing gaps.


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