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Meaning of ARBITRAGE

Discuss Meaning of ARBITRAGE within the Financial Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; WHAT IS ARBITRAGE? DEFINITION: THE PRICEOF THE SAME ASSET IS DIFFERENT IN TWO MARKETS , THERE WILL BE OPERATORS WHO ...

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Meaning of ARBITRAGE
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Abhijeet S
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Meaning of ARBITRAGE - September 13th, 2010

WHAT IS ARBITRAGE?

DEFINITION:
THE PRICEOF THE SAME ASSET IS DIFFERENT IN TWO MARKETS , THERE WILL BE OPERATORS WHO WILL BUY IN THE MARKET WHERE THE ASSET SELLS CHEAP AND SELL IN THE MARKET WHERE IT IS COSTLY. THIS ACTIVITY IS TERMED AS ARBITRAGE.


BUYING CHEAP AND SELLING EXPENSIVE CONTINUES TILL PRICES IN BOTH THE MARKETS REACH AN EQUILIBRIUM.


HENCE ARBITRAGE HELPS TO EQUILIZE PRICES AND RESTORE MARKET EFFICIENCY.


THEORETICALLY ARBITRAGE REQUIRES NO CAPITAL , ENTAILS NO RISK AND APPEARS TO BE AN EASY WAY OF EARNING PROFITS.


HOWEVER , REAL WORLD ARBITRAGE CALLS FOR LARGE OUTLAY OF CAPITAL , ENTAILS SOME RISK AND IS A LOT MORE COMPLEX .


FOR ARBITRAGE TO BE RISK FREE PROCESS THE ARBITRAGEUR MUST OPERATE SIMUALTENOUSLY IN TWO DIFFERENT MARKETS.
IN EFFICIENT MARKETS ARBITRAGE OPPORTUNITIES LAST FOR VERY SHORT PERIODS.


ARBITRAGUERS SPOT THESE OPPORTUNITIES ,ACT UPON THEM ,THE ARBITRAGE GETS WIPED OUT.


THE FAST INSTANCES OF ARBITRAGE OPPORTUNITIES BEING WIPEDOUT ,ARE THOSE SEEN IN THE FOREIGN EXCHANGE MARKET.


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