arbitrage

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Arbitrage

The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly efficient markets seldom exist, but, arbitrage opportunities are often precluded because of transactions costs.

Arbitrage

An investment practice that attempts to profit from inefficiencies in price by making transactions that offset each other. For example, one may buy a security at a low price and, within a few seconds, re-sell it to a willing buyer at a higher price. Arbitrageurs can keep prices relatively stable as markets try to resist their attempts at price exploitation. Arbitrageurs often use computer programs because their transactions can be complex and occur in rapid succession.

arbitrage

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.

Arbitrage.

Arbitrage is the technique of simultaneously buying at a lower price in one market and selling at a higher price in another market to make a profit on the spread between the prices.

Although the price difference may be very small, arbitrageurs, or arbs, typically trade regularly and in huge volume, so they can make sizable profits.

But the strategy, which depends on split-second timing, can also backfire if interest rates, prices, currency exchange rates, or other factors move in ways the arbitrageurs don't anticipate.

arbitrage

the buying and selling of PRODUCTS, FINANCIAL SECURITIES or FOREIGN CURRENCIES between two or more markets in order to take profitable advantage of any differences in the prices quoted in those markets.

If the price of the same product is different, as between two markets, a dealer, by simultaneously buying in the lower-priced market and reselling in the higher-priced market, stands to make a profit on the transaction (allowing for dealing expenses). Arbitrage thus serves to narrow or eliminate price differentials between markets, with buying in the lower-priced market causing prices to rise there, and selling in the higher-priced market causing prices to fall. See SPOT MARKET, ARBITRAGEUR, SPECULATION, COVERED INTEREST ARBITRAGE.

arbitrage

the buying or selling of PRODUCTS, FINANCIAL SECURITIES or FOREIGN CURRENCIES between two or more MARKETS in order to take profitable advantage of any differences in the prices quoted in these markets. By simultaneously buying in a low-price market and selling in the high-price market a dealer can make a profit from any disparity in prices between them, though in the process of buying and selling the dealer will add to DEMAND in the low-price market and add to SUPPLY in the high-price market, so narrowing or eliminating the price disparity. See SPOT MARKET, FUTURES MARKET, COVERED INTEREST ARBITRAGE.

arbitrage

The simultaneous purchase in one market and sale in another market of a commodity, security,or monies,in the expectation of making a profit on price differences in the differing markets. Generally thought of as involving foreign currency exchanges,in which one enters contracts to buy euros and sell yen and hopefully make money in a moment in time when the exchange rates work out in one's favor (this is highly risky).

References in periodicals archive ?
The next proposition shows that the general indifference principle is consistent with arbitrage-free pricing.
Rephrased, this theorem states that a tax system is arbitrage-free if it is not possible for all of the positions held by all investors to net to zero, but yet the net total after-tax value of these assets is positive.
4) This PSP return series represents the estimated arbitrage-free return series for each firm.
Hence, the tracking test is ultimately a joint test of (1) whether the PSP return series (|Mathematical Expression Omitted^) based on cash flow variability provides a measure of an asset's arbitrage-free systematic return series, and (2) whether the actual return series (|Mathematical Expression Omitted^) of a target asset provides an unbiased measure of its arbitrage-free systematic return series.
The fundamental theorem of asset pricing still applies and the arbitrage-free price of a derivative is still given in terms of an expectation under a risk-neutral (equivalent) probability measure (Delbaen and Schachermayer, 1994).
One possible arbitrage-free price of a European-type contingent pay-off f([S.
This mean-correcting martingale measure is used to calculate an arbitrage-free price for a call option which is given by Merton (1976) as