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Arbitrage

• The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly efficient markets seldom exist.

• Strictly defined, buying something where it is cheap and selling it where it is dear; for example, a bank buys 3-month CD money in the U.S. market and sells 3-month money at a higher rate in the Eurodollar market. In the money market, often refers: (1) to a situation in which a trader buys one security and sells a similar security in the expectation that the spread in yields between the two instruments will narrow or widen to his profit, (2) to a swap between two similar issues based on an anticipated change in yield spreads, and (3) to situations where a higher return (or lower cost) can be achieved in the money market for one currency by utilizing another currency and swapping it on a fully hedged basis through the foreign-exchange market.

• Is a form of trading which attempts to profit by discrepancies in price due to location, funding, volatility, communications, response to information, or other differences. Typically, the price differences are small and only the quickest, most cost efficient or funding efficient parties participate. Compare with Risk Arbitrage.

 
 Embedded terms in definition
 Basis
Change
Cheap
Currency
Efficient market
Eurodollar
In the money
Instruments
Market
Money market
Prices
Profit
Return
Risk arbitrage
Risk
Security
Spread
Swap
Trading
U
Volatility
Will
Without
Yield
 
 Referenced Terms
 American depositary receipt: Is an instrument which is issued in the United States but based on foreign securities. This security facilitates trading and investment because it is quoted in terms of the U.S. Dollar. This compares to the initial situation of the underlying shares quoted and traded in currencies other than the U. S. dollar.Abbreviated ADR or ADRS. Certificates issued by a U.S. depositary bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's are sponsored, the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADRs. Unsponsored ADRs do not receive such assistance. ADRs carry the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by Arbitrage. American depositary shares (ADSs) are a similar form of certification.Claims issued by U.S. banks representing ownership of shares of a foreign company's stock held on deposit by the U.S. bank in the foreign market and issued in dollars to U.S. investors.A negotiable certificate representing a given number of shares of stock in a foreign corporation; it is bought and sold in the American securities markets, just as stock is traded. ADRs are issued by a U.S. bank, consisting of a bundle of shares of a foreign corporation that are being held in custody overseas. ADRs can be sponsored, which means the corporation provides financial and other information to the bank, or unsponsored. While ADRs have the same currency and economic risks as the underlying foreign shares, they are much more convenient for U.S. shareholders to own since there are no problems in transferring securities from a foreign country or currency conversion.

 Arbitrage pricing theory: Abbreviated APT. An alternative model to the capital asset pricing model developed by Stephen Ross and based purely on Arbitrage arguments.

 Arbitrageurs: People who search for and exploit Arbitrage opportunities.

 Black scholes option pricing model: A model for pricing call options based on Arbitrage arguments that uses the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation of the stock return.

 Box: Has two primary meanings. It can refer to an options strategy or an operations term. For the later, it is the safe, cabinet, or other physical depository for securities which islocated in the back office. When box refers to an to an options strategy it is the placement of both a bull and a bear spread. One spread is comprised of puts and the other is comprised of calls. Both spreads have the same expiration. It is an Arbitrage technique which self liquidates at expiration. Boxes can be executed as either debit or credit strategies.

 
 Related Terms
 Arbitrage free option pricing models
Arbitrage pricing theory
Bond arbitrage hedge funds
Covered interest arbitrage
Currency arbitrage
Index arbitrage
Market arbitrage
Risk arbitrage
Risk controlled arbitrage
Riskless arbitrage
Structured arbitrage transaction
Triangular arbitrage

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Discovery consists of looking at the same thing as everyone else does and thinking something different. - Albert Szent-Gyorgyi, 1937 Nobel Prize in Physiology and Medicine

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