In finance, arbitrage describes profiting from price differences for the same or equivalent asset in different markets.
A classic arbitrage transaction buys an asset where it is cheaper and sells it where it is more expensive, ideally at nearly the same time. The trader seeks to capture the spread while limiting exposure to changes in the asset’s underlying value. In practice, transaction costs, taxes, delays, borrowing constraints, and execution risk can reduce or eliminate the opportunity.
Arbitrage activity can push prices toward consistency. If many traders buy in the cheaper market and sell in the dearer one, demand and supply tend to narrow the difference. The theoretical “law of one price” says identical assets should have the same price in efficient markets after relevant costs are considered.
Arbitrage is different from hedging, which reduces risk, and speculation, which accepts risk in pursuit of a price gain.