In economics, investment and sports, arbitrage is the practice of taking benefit from a price difference between several markets: striking a combination of matching deals that take advantage upon the asymmetry, the profit being the differences relating to the market prices.
When used by academics, an arbitrage is actually a transaction that concerns no bad cashflow at any probabilistic or temporal state plus a positive cash flow in a minimum of one state; in simple terms, it is the probability of a risk-free profit at zero cost.
In principle as well as in academic use, an arbitrage is risk-free; in common use, such as statistical arbitrage, it might relate to expected profit, though losses may happen, and in practice, there are always risks in arbitrage, some minor (along the lines of fluctuation of prices decreasing profit margins), some major (which include devaluation of your currency or derivative).
In academic use, an arbitrage involves benefiting from variations in cost of a single asset or identical cash-flows; in common use, it’s also used to refer to differences between equivalent assets (relative value or convergence trades), for example merger arbitrage.
Individuals that take part in arbitrage are called arbitrageurs for example a bank or brokerage firm. The term is mainly related to trading in financial instruments, for example bonds, shares, derivatives, products and currencies.
Specific sport arbitrage has also recently become feasible because of the availability of online bookmakers offering up widely diverging odds on sporting events producing situations where you’ll be able to where you can’t lose
Even though this involves bookmakers it’s not gambling as there is no risk to the initial stake which can’t be lost. These betting systems or betting strategies are called ‘Arbitrage Betting’ or ‘Matched Betting’
Arbitrage is not simply the act of buying a product within a market and selling it in another for a better price at some later time. The dealings must occur simultaneously to prevent exposure to market risk, or maybe the risk that prices may change on one market before both transactions are finished.
In simple terms, this is generally only possible with securities and financial products which can be traded electronically, and even then, when each leg of this trade is accomplished the prices on the market might have moved.
Missing one of the legs of the trade (and subsequently being forced to trade it soon after at a worse price) is known as ‘execution risk’ or more specifically ‘leg risk’.
“True” arbitrage mandates that there be no market risk concerned.