Risk glossary

 

Arbitrage

1) A trading strategy to profit from market inefficiencies in price differences of a given commodity, either at the same location or at different geographical locations. Grade arbitrage is trading the difference in the price of a commodity in the same location – for example, the difference in the prices of two sweet crudes in northwest Europe. Geographical arbitrage is trading the difference in the price of the same grade in different locations, after adjusting for the cost of transport between the locations. Often grade and geographical arbitrage are combined – in transatlantic arbitrage, for instance, which is trading the price difference between, for example, Brent crude in Europe and West Texas Intermediate (WTI) in the US, this calculation will include the cost-of-carry as well as the cost of the alternative crude in the US.

2) Attempting to profit from differences in price when the same security, currency or commodity is traded on two or more markets.

3) Attempting to benefit from different regulations in different areas of jurisdiction.

* see also regulatory arbitrage

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