arbitrage
noun
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Definition of arbitrage
(Entry 1 of 2)
arbitrage
verbDefinition of arbitrage (Entry 2 of 2)
Examples of arbitrage in a Sentence
Recent Examples on the Web: Noun
Critics say that the spread between how wages and investments are taxed can encourage rate arbitrage, creating opportunities for the wealthy to lessen their tax bills. 5. — Laura Davison, Fortune, "Capital Gains: The Tax Biden Wants to Double and Trump Would Slash," 29 July 2019 The details will have to be worked out, but the idea is to transfer the investment risk from workers and retirees to creditors while exploiting interest-rate arbitrage. — The Editorial Board, WSJ, "Chicago Has Another Bond for You," 17 Aug. 2018 The recent growth of PE into healthcare providers has provided little value creation beyond gamesmanship around M&A and multiple arbitrage, while likely driving up costs for patients. — Polina Marinova, Fortune, "Home Insurance Startup Hippo Joins the ‘Unicorn’ Club: Term Sheet," 24 July 2019 The firm has largely focused on copper arbitrage, or trading mismatches between market prices for the industrial metal. — Stephanie Yang, WSJ, "Metals Trading Firm Arion Adds Energy Veteran Beau Taylor to Board," 10 Apr. 2019 But satellite data on store performance has been around for eight years, and an arbitrage opportunity clearly still exists in the market. — Tim Fernholz, Quartz, "You can make millions counting cars in parking lots from space," 26 June 2019 Short-term traders move rapidly between different assets, hoping to score profits on arbitrage opportunities. — Matthew De Silva, Quartz, "The rationalist’s case for buying bitcoin," 10 June 2019 To pad what can otherwise be thin margins, Acela has honed a kind of exchange-rate arbitrage, hoarding gourdes from purchases at the depot until the dollar weakens. — Rowan Moore Gerety, Harper's magazine, "Downstream," 10 June 2019 In addition to mutual funds, there are two ETFs that promise exposure to merger arbitrage, but at a lower cost. — Bailey Mccann, WSJ, "How Investors Can Cash In on the M&A Boom," 5 Aug. 2018Recent Examples on the Web: Verb
One explanation is that foreigners have direct access to the market, and so large price gaps can be arbitraged away quickly. — Nathaniel Taplin, WSJ, "A Chinese Oil Slick for the Dollar?," 18 Sep. 2018 One risk is that, as local investors clamour to buy them, CDRs will trade at a huge premium to their foreign counterparts. Because of capital controls, there is no channel for arbitraging between onshore and offshore markets. — The Economist, "China tries to lure its tech firms into listing at home," 10 May 2018 As Ars Technica points out, arbitraging cheap power is a widespread business tactic in industries as diverse as aluminum production and marijuana cultivation. — David Z. Morris, Fortune, "Bitcoin Miners Can Now Be Charged Extra for Electricity, New York Power Authorities Say," 17 Mar. 2018 Of course, cryptocurrency mining is hardly the first industry to arbitrage electricity prices to make some good's production more profitable. — Megan Geuss, Ars Technica, "New York power companies can now charge Bitcoin miners more," 16 Mar. 2018 Inside the Big Plan to Make Ethereum Go Mainstream Share this episode with your friends Another option is arbitraging price differences between Korean exchanges, Bae said. — Julie Verhage, Bloomberg.com, "Bitcoin's 43% Arbitrage Trade Is a Lot Tougher Than It Looks," 9 Jan. 2018 Another puzzle with anomalies is why they are not arbitraged away. — The Economist, "“Factor investing” gains popularity," 1 Feb. 2018 Korea’s Forex Rules To arbitrage the price gaps between bitcoin venues in Korea and elsewhere, local traders must first exchange their won into a foreign currency, such as the dollar or euro, that’s accepted by overseas cryptocurrency venues. — Julie Verhage, Bloomberg.com, "Bitcoin's 43% Arbitrage Trade Is a Lot Tougher Than It Looks," 9 Jan. 2018 Sell the beer at a reasonable price (whatever that means), and all of the sudden it's being arbitraged left and right. — Aaron Goldfarb, Esquire, "Affordable Beer Is Dead. Long Live Luxury Beer.," 6 Oct. 2015These example sentences are selected automatically from various online news sources to reflect current usage of the word 'arbitrage.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.
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More Definitions for arbitrage
arbitrage
nounFinancial Definition of arbitrage
What It Is
Arbitrage is the process of exploiting differences in the price of an asset by simultaneously buying and selling it. In the process the arbitrageur pockets a risk-free return. Differences in prices usually occur because of imperfect dissemination of information.
How It Works
For example, if Company XYZ's stock trades at $5.00 per share on the New York Stock Exchange (NYSE) and the equivalent of $5.05 on the London Stock Exchange (LSE), an arbitrageur would purchase the stock for $5 on the NYSE and sell it on the LSE for $5.05 -- pocketing the difference of $0.05 per share.
Theoretically, the prices on both exchanges should be the same at all times, but arbitrage opportunities arise when they're not. In theory, arbitrage is a riskless activity because traders are simply buying and selling the same amount of the same asset at the same time. For this reason, arbitrage is often referred to as "riskless profit."
Arbitrageurs also try to exploit price differences created by mergers. In some cases, they purchase the shares of companies that are the targets of purchase offers, hoping to pocket the difference between the trading price and the eventual cash payment resulting from the merger. Even though this type of strategy is referred to as "arbitrage," it's a bit of a misnomer because there's always a risk that a merger will not actually happen. Because it's not risk-free, merger arbitrage is not "arbitrage" in its truest sense.
Why It Matters
Only large institutional investors and hedge funds are capable of taking advantage of arbitrage opportunities. Because they're able to trade large blocks of shares, they can pocket millions in arbitrage profits even if the spread between two security prices is small (and it usually is just pennies).
By contrast, individual investors typically don't have the large sums of money needed to take advantage of arbitrage opportunities, and trading fees would eat up any profits an individual arbitrageur hoped to secure. Institutional investors aren't burdened by these same limitations.
Of course, small investors and entrepreneurs take advantage of much smaller arbitrage opportunities every single day. For example, if you've ever purchased a bargain-priced item at a garage sale or flea market, and then sold that item for a higher price on eBay, then you've profited from a form of arbitrage.
The main creator of arbitrage opportunity used to be a lack of real-time communication about prices in other markets, but modern technology has reduced the number of arbitrage opportunities out there. The relatively few arbitrage opportunities that do exist are elusive and don't last for long -- when people realize that a security is cheaper in one market than another, their interest in exploiting the opportunity will drive up the price of the "cheap" security and drive down the price of the "expensive" security until there is no longer a price difference. In this manner, arbitrage does a good job of ensuring equilibrium in the markets.
Source: Investing Answers
arbitrage
noun
English Language Learners Definition of arbitrage
See the full definition for arbitrage in the English Language Learners Dictionary
arbitrage
noun
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