Super Fitness Health BlogThe use of Arbitrage in fiscal markets: Are they bets you can’t lose?
In economics, investment and sports, arbitrage is the technique of taking advantage of a price difference between two or more markets: striking a mixture of matching deals that capitalize upon the discrepancy, the gain being the differences within the market prices.
When used by academics, an arbitrage can be a transaction that concerns no bad cashflow at any probabilistic or temporal state and also a positive income in one or more state; simply, it is the probability of a risk-free gain at zero cost. In effect free money from bets where no risk existed.
In banking markets this is known as ‘Arbitrage’. In sports markets it is known as Matched Betting.
In principle and within academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it might relate to anticipated profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor (along the lines of fluctuation of prices decreasing profit margins), some major (for example devaluation of your currency or derivative).
In academic use, an arbitrage involves benefiting from differences in price of a single asset or identical cash-flows; in common use, it might be used to refer to differences between very similar assets (relative value or convergence trades), as in merger arbitrage.
People who practice arbitrage are known as arbitrageurs for instance a bank or brokerage firm. The phrase is primarily related to trading in financial instruments, for example bonds, shares, derivatives, commodities and currencies.
Specific sport arbitrage has also recently become possible mainly because of the availability of world-wide-web bookmakers offering widely diverging odds on sports creating situations where it’s possible to place bets that cannot lose.
Even though this involves bookmakers it is not gambling as there’s no risk on the initial stake which cannot be lost.
Arbitrage just isn’t simply the act of purchasing a physical product within a market and selling it in another for a larger price at some later time. The transactions must happen simultaneously in order to avoid exposure to market risk, or perhaps the risk that prices may change on a single market before both dealings are completed.
In simple terms, this can be generally only possible with securities and financial products that may be traded electronically, and even then, when each leg of your trade is performed the prices sold in the market could possibly 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 necessitates that there be no market risk involved.
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