In economics, investment and sports, arbitrage is the technique of taking advantage of a price difference between 2 or more markets: striking the variety of matching trades which take advantage upon the discrepancy, the profit being the gap between the market prices.
When employed by academics, an arbitrage can be described as transaction which involves no negative cashflow at any probabilistic or temporal state along with a positive income in a minimum of one state; in simple terms, it is the chance of a risk-free profit at zero cost. In effect free money from trades where no risk existed.
In financial markets this is called ‘Arbitrage’. In gambling markets it is known as Matched Betting.
In principle as well as in academic use, an arbitrage is risk-free; in common use, for example statistical arbitrage, it may reference anticipated profit, though losses may manifest, and in practice, there are always risks in arbitrage, some minor (for instance fluctuation of prices decreasing profit margins), some major (for example devaluation of the currency or derivative).
In academic use, an arbitrage involves taking advantage of variations in price of a single asset or identical cash-flows; in common use, it might be utilized to refer to differences between very similar assets (relative value or convergence trades), such as merger arbitrage.
Individuals who practice arbitrage are called arbitrageurs perhaps a bank or brokerage firm. The term is primarily ascribed to trading in financial instruments, like bonds, futures, derivatives, commodities and currencies.
Sports arbitrage has also recently become practical mainly because of the use of world wide web bookmakers providing widely diverging odds on sports making situations where you’re able to place bets that cannot lose.
And even though this involves bookmakers it is not gambling as there is no risk on the initial stake which cannot be lost.
Arbitrage is not simply the act of buying a physical product within a market and selling it in another for a better price at some later time. The dealings must take place simultaneously in order to avoid exposure to market risk, or maybe the risk that prices may change on one market before both trades are finished.
In practical terms, this can be generally only possible with securities and financial products that may be traded electronically, and even then, when each leg of the trade is accomplished the values sold in the market could 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 mandates that there be no market risk involved.



