Market Watch ForEX ArBi TrAGE
FX
Te following is an explanation of what arbitrage is and in further articles we will delve into larger technical issues of executing “arb” systems.
WHAT IS ‘ARBITRAGE’ ?
In economics and finance, arbitrage (IPA: /ˈɑrbɨtrɑːʒ/) is
the practice of
taking advantage of a price difference between two or more markets: striking
a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-fee profit at zero cost.
In principle and in academic use,
an arbitrage is risk-fee; in common use, as in statistical arbitrage, it may refer to expected profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor (such as fluctuation of prices decreasing profit margins), some major (such as devaluation of a currency or derivative). In academic use, an arbitrage involves taking advantage of differences in price of a single asset or identical cash-flows; in common use, it is also used to refer
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