In business economics, finance and sports, arbitrage is the concept of taking benefit from a price difference between two or more markets: striking a combination of matching deals that take advantage upon the imbalance, the gain being the differences relating to the market prices.

When utilized by academics, an arbitrage is actually a transaction that needs no negative cash flow at any probabilistic or temporal state including a positive cashflow in at least one state; essentially, it is the potential for a risk-free profit at zero cost.

In principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may well mean anticipated profit, though losses may manifest, and in practice, there are always risks in arbitrage, some minor (including change of prices decreasing profit margins), some major (which include devaluation of the currency or derivative).

In academic use, an arbitrage involves taking advantage of differences in cost of a single asset or identical cash-flows; in common use, it’s also employed to mean differences between very similar assets (relative value or convergence trades), as in merger arbitrage.

Individuals that engage in arbitrage are called arbitrageurs for instance a bank or brokerage firm. The phrase is principally ascribed to trading in financial instruments, including bonds, shares, derivatives, commodities and currencies.

Sports arbitrage has additionally recently become practical as a result of use of internet bookmakers offering up widely diverging odds on sporting events establishing situations where it’s possible to where you can’t lose

Although this involves bookmakers this isn’t gambling as there isn’t any risk on the initial stake which cannot be lost. These betting systems or betting strategies are called ‘Arbitrage Betting’ or ‘Matched Betting’

Arbitrage is just not simply the act of buying an item within a market and selling it in another for a larger price at some later time. The dealings must happen simultaneously to protect yourself from exposure to market risk, or perhaps the risk that prices may change on a single market before both dealings are completed.

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

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

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