What is Arbitrage?
Arbitrage is a trade in which the market inefficiencies are exploited in pursuit of making profit. In other words, Arbitrage is buying securities in low prices from one market and selling them to the other on higher prices in order to take the benefits of odds of similar financial instruments. Thus, it gives an opportunity to have risk-free profit on assets. So, it is connected to financial investment trading of assets like stocks, currencies, bonds or commodities, but it can even go beyond. Overall, arbitrage is result of inefficiencies of the market. Generally, arbitrage helps traders gain instant profit.
Types of Arbitrage
There are different categories in which arbitrage is divided such as spatial arbitrage, merger arbitrage, convertible bond arbitrage, cross border arbitrage, regulatory arbitrage, telecom arbitrage and statistical arbitrage.
Spatial Arbitrage:
This is a very simple form of arbitrage. It is also popular with the name of geographical arbitrage. In this, the geographical markets are exploited. The arbitrageur buys bonds from a dealer and sells it to the other for making profit.
Merger Arbitrage:
Merger arbitrage is also known as risk arbitrage. In this, dealing happens in stocks. In merger arbitrage, the traders can buy or hold the stock of a company in order to make profit on the differences.
Convertible Bond Arbitrage:
In this kind of arbitrage, convertible bonds which can be taken as corporate bond too. In this, an investor has the option of returning a convertible bond to the company and they get shares on its return. That’s the reason that it is called the convertible bond arbitrage.
Sports Arbitrage:
In this type of arbitrage punters places bets on both the outcome of a match team A will win and Team B will win if he puts 100 on both teams even if any team win he will will win 100 plus some profit. This strategy also known as sure bets, you can check the list of sure bets at myarbets.com
Cross-border Arbitrage:
In cross-border arbitrage, difference in prices of the same stock in different countries is exploited.
Regulatory Arbitrage:
In regulatory arbitrage, the regulated institution exploits the differences for making profit. It is mainly beneficial if real risk is relatively higher as compared to regulatory risk of the institution.
Telecom Arbitrage:
In telecom arbitrage, the mobile companies of different countries provide their citizens a feature of free international calls on some particular numbers. This is quite common in case of the UK. For this purpose, mobile network of UK pays to these arbitrage companies of telecommunication, with the help of which these companies are able to buy the international routes at a very low cost. In this service, the people get free minutes to make international calls, but the customers are not required to pay anything extra.
Statistical Arbitrage:
Statistical arbitrage comes in picture when expected nominal values have some imbalance. Generally, a casino has this type of arbitrage. Casinos offer a variety of games of chance and statistical arbitrage falls in place in all of them. This is also one of the short-term strategies of financial trading of securities which are for seconds to few days.
