What is arbitrage?

Arbitrage is a financial strategy that involves taking advantage of price differences for the same asset in different markets or exploiting disparities between related financial instruments. The goal of arbitrage is to make a profit by buying low in one market and selling high in another, thereby exploiting market inefficiencies.
There are several types of arbitrage, including:

1. Spatial Arbitrage: Involves exploiting price differences of the same asset in different geographic locations. Traders buy the asset where it is priced lower and sell it where it is priced higher.
2. Temporal Arbitrage: Takes advantage of price differences at different points in time. For example, a trader might buy a financial instrument at a lower price in the futures market and sell it at a higher price in the spot market.
3. Statistical Arbitrage: Utilizes mathematical models to identify pricing inefficiencies between related financial instruments. Traders use statistical analysis to identify patterns and correlations, making trades based on the expected convergence of prices.
4. Risk Arbitrage (Merger Arbitrage): Involves exploiting price discrepancies in securities of companies involved in mergers and acquisitions. Traders take positions based on the belief that the market has not accurately reflected the true value of the securities in light of the pending corporate actions.
5. Convertible Arbitrage: Focuses on exploiting price differences between a company's stock and its convertible securities, like convertible bonds. Traders may simultaneously buy the convertible security and short the underlying stock to profit from discrepancies.

Arbitrage opportunities are often short-lived, as market participants quickly react to correct pricing imbalances. Efficient markets tend to minimize the occurrence of persistent arbitrage opportunities, but they can still arise due to various factors such as delays in information dissemination, transaction costs, or market frictions.