The concept of Arbitrage in financial markets: Are they bets you can't ...

In economics, finance and sports, arbitrage is the practice of taking benefit from a cost difference between several markets: striking a mixture of matching bets which? take advantage upon the difference, the gain being the difference within market prices.

When used by academics, an arbitrage is usually a transaction that concerns no bad cash flow at any probabilistic or temporal state along with a positive cashflow in a minimum of one state; in simple terms, it is the chance of a risk-free profit at zero cost. Essentially free money from trades where no risk existed.
In financial markets this is known as ?Arbitrage?. In sports markets it is known as Matched Betting.

In principle as well as in academic use, an arbitrage is risk-free; in common use, for example statistical arbitrage, it may well refer to expected profit, though losses may take place, and in practice, there are always risks in arbitrage, some minor (for example change of prices decreasing income), some major (for example devaluation of the currency or derivative).

In academic use, an arbitrage involves taking advantage of variations in price of a single asset or identical cash-flows; in common use, it is also used to make reference to differences between very similar assets (relative value or convergence trades), as in merger arbitrage.

Those who engage in arbitrage are called arbitrageurs for instance a bank or brokerage firm. The word is principally given to trading in financial instruments, which include bonds, stocks and shares, derivatives, goods and currencies.

Specific sport arbitrage has also recently become possible mainly because of the use of online bookmakers giving widely diverging odds on sports setting up situations where it is possible to place bets that cannot lose.

And even though this involves bookmakers it?s not gambling as there?s no risk on the initial stake which cannot be lost.

Arbitrage just isn?t simply the act of buying a product within a market and selling it in another for a higher price at some later time. The dealings must transpire simultaneously in order to avoid exposure to market risk, or perhaps the risk that prices may change on a single market before both deals are completed.

In simple terms, this is generally only possible with securities and financial products which might be traded electronically, and even then, when each leg of this trade is accomplished the values sold in the market may have moved.

Missing one of the legs of the trade (and subsequently having to trade it immediately after at a worse price) is known as ?execution risk? or more specifically ?leg risk?.

?True? arbitrage requires that there be no market risk included.

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