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In economics, investment and sports, arbitrage is the method of taking advantage of a price difference between two or more markets: striking a variety of matching deals that capitalize upon the asymmetry, the gain being the differences relating to the market prices.

When utilized by academics, an arbitrage is often a transaction that needs no damaging cashflow at any probabilistic or temporal state and also a positive cashflow in a minimum of one state; simply, it’s the potential for a risk-free profit at zero cost.

In principle and in academic use, an arbitrage is risk-free; in common use, such as statistical arbitrage, this could relate to projected profit, though losses may happen, and in practice, there are always risks in arbitrage, some minor (along the lines of change of prices decreasing income), some major (along the lines of 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 might be employed to mean differences between very similar assets (relative value or convergence trades), such as merger arbitrage.

Individuals who engage in arbitrage are called arbitrageurs say for example a bank or brokerage firm. The term is principally applied to trading in financial instruments, for example bonds, stocks and shares, derivatives, products and currencies.

Specific sport arbitrage has additionally recently become possible because of the accessibility to online bookmakers supplying widely diverging odds on sports making situations where it’s possible to where you can’t lose

Even though this involves bookmakers it’s not gambling as there is absolutely no risk on the initial stake which cannot be lost. These betting systems or betting strategies are called ‘Arbitrage Betting’ or ‘Matched Betting’

Arbitrage is not simply the act of buying a product within a market and selling it in another for a higher price at some later time. The deals must happen simultaneously to stop exposure to market risk, or even the risk that prices may change in one market before both trades are completed.

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

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

“True” arbitrage necessitates that there be no market risk included.

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