Arbitrage

Arbitrage is the purchase and sale of equivalent assets in different markets to profit from price differences. Competition and transaction costs usually limit these opportunities.

Law of One Price: The principle that identical assets should have the same price in efficient markets, after accounting for costs and barriers. Arbitrage pushes equivalent assets toward equal prices across markets.
Triangular arbitrage: A foreign-exchange strategy that exploits inconsistent exchange rates among three currencies. It turns a mismatch among currency quotes into a three-step trading cycle.
Speculation: Taking financial risk in expectation of future price changes or other uncertain outcomes. Unlike arbitrage, speculation generally depends on an uncertain directional price move.
Market efficiency: The degree to which asset prices reflect available information. Arbitrage is one force that makes market prices incorporate information and reduce mispricing.
Bid–ask spread: The difference between the highest price buyers will pay and the lowest price sellers will accept. A price gap must exceed trading spreads before an arbitrage trade can profit.
Cash-and-carry arbitrage: A strategy that buys an asset and sells a futures contract on it when their prices diverge from carrying-cost parity. It exploits mispricing between an asset and its futures contract.
Market making: The practice of quoting buy and sell prices while standing ready to trade from inventory. Market makers earn spreads and manage inventory rather than necessarily locking in cross-market price gaps.
Price convergence: The movement of prices toward one another as a discrepancy between related assets narrows. Buying the cheaper asset and selling the dearer one tends to close their price gap.
Transaction cost: An expense incurred when arranging or executing an economic exchange. Fees, taxes, and settlement expenses can erase apparent arbitrage profits.
Convertible arbitrage: A strategy that buys a convertible security and often shorts its underlying stock to exploit relative mispricing. It trades the pricing relationship between convertible bonds and their shares.

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