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 ?
For arbitrage-free valuation, one has to calculate the expected value under a certain risk-neutral measure Q given the existence of a liquid market and independent of the existing portfolio.
For instance, in case suitable cat bonds are available for perfectly replicating the respective instrument's cash flows (e.g., an ILW or another cat bond), a unique arbitrage-free price can be derived.
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.
We will only consider fair contracts with an identical initial arbitrage-free price of 1; that is, we consider contracts c [member of] {rol, rat, cli} with [A.sup.c.sub.0] (g, [alpha], [theta]) = 1, where (g, [alpha], [theta]) [member of] [-[infinity], r] x (0, 1] x [0, 1].
In this Appendix, we give the arbitrage-free prices for the three guaranteed products considered in the "Application of MCPT: Explaining the Demand for Cliquet Type Guarantees" section at [t.sub.0] = 0 and at each lock-in date [t.sub.1], ..., [t.sub.n-1].
We refer to Harrison and Kreps (1979) or more recently to Bjork (2004) for an extensive theory on arbitrage-free pricing.
The next proposition shows that the general indifference principle is consistent with arbitrage-free pricing.
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).
In this section, we summarize evaluation methods to price financial contingent claims using arbitrage-free theory.
In incomplete markets, the price of the option is not unique, and the interval between the buyer's and seller's prices describes the possible range of arbitrage-free evaluations.
The model used is similar to that in Myers and Read (2001) and we assume complete and arbitrage-free markets where valuation is based on a general economic valuation framework with a stochastic discount factor.
The discrepancy between the actuarial premium and the financial approach premium is exactly the amount of additional equity capital that would be needed in an arbitrage-free market.