Copyright © Philip M. Parker, INSEAD. Terms of Use.
Definition: Arbitrage |
ArbitrageNoun1. A kind of hedged investment meant to capture slight differences in price; when there is a difference in the price of something on two different markets the arbitrageur simultaneously buys at the lower price and sells at the higher price. Verb1. Practice arbitrage, as of stocks. Source: WordNet 1.7.1 Copyright © 2001 by Princeton University. All rights reserved. |
Etymology: Arbitrage \Ar"bi*trage\, noun. [French expression, from arbiter to give judgment, from Latin expression arbitrari.]. (references) |
| Domain | Definition |
Business | A)financial operation consisting of buying and selling on different markets with the purpose of taking advantage of the differences in prices quoted; b)the changing of funds from one or more securities to other securities in order to protect the capital. Source: European Union. (references) |
Economics | A method of taking advantage of the fact that there may be different prices in different markets for identical goods such as gold, foreign exchange or commodities. Simultaneously, one buys in the lower price market and sells in the higher one. (references) |
Finance | Strategy established to take advantage of the disequilibrium of the market for a riskless profit. Source: European Union. (references) |
| A transaction in which an investor buys commodities, funds, mortgages, futures contracts, mortgage-backed securities or other securities in one market and simultaneously sells them in a different market in order to profit from differences in price between the two markets. (references) | |
Mining | An operation that involves a purchase in one market with the simultaneous sale of an equivalent quantity in another market, (e.g., the London Metal Exchange and the New York Commodity Exchange), and the necessary foreign exchange transaction to protect against any change in the parities betweenthe two currencies involved. (references) |
Source: compiled by the editor from various references; see credits. | |
(From Wikipedia, the free Encyclopedia)
In economics, arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices. A person who engages in arbitrage is called an arbitrageur.For example, if you can buy items at one price at a factory outlet and sell them for a higher price on an internet auction website such as eBay, you can exploit the imbalance between those two markets for those items. The term "arbitrage", however, is usually applied only to trading in money and investment instruments (such as stocks, bonds, and other securities), not to goods, and the difference in prices is usually referred to as "the spread", so arbitrage is often defined as "playing the spread" in the money market.
Arbitrage has the effect of causing prices in different markets to converge. As a result of arbitrage, the currency exchange rates, the price of commodities, and the price of securities in different markets all tend to converge to a fixed price. The speed at which the prices converge is one measure of the efficiency of a market.
Examples
Here's a theoretical example: Suppose that the exchange rates (after taking out the fees for making the exchange) in London are £5 = $10 = ¥1000 and the exchange rates in Tokyo are ¥1000 = £6 = $10. Converting $10 to £6 in Tokyo and converting that £6 into $12 in London, for a profit of $2, would be arbitrage.One real-life example of arbitrage involves the stock market in New York and the futures market in Chicago. When the price of a stock in New York and its corresponding future in Chicago are out of sync, one can buy the less expensive one and sell the more expensive. Because the differences between the prices are likely to be small (and not to last very long), this can only be done profitably with computers examining a large number of prices and automatically exercising a trade when the prices are far enough out of balance. The activity of other arbitrageurs can make this risky. Those with the fastest computers and the smartest mathematicians take advantage of series of small differentials that would not be profitable if taken individually.
Risks
Arbitrage is subject to a number of risks which become magnified when leverage or borrowed money is used. It can be problematic if prices shift adversely during the execution of trades. Another risk occurs if the items being bought and sold are not identical and the arbitrage is conducted under the assumption that the prices of the items are correlated or predictable.Long-Term Capital Management (LTCM) lost $100 billion mis-managing this concept in September 1998. LTCM had attempted to make money on the difference between different bond instruments. For example, it would buy U.S treasury bonds and sell Italian bond futures. The concept was that because Italian bond futures had a less liquid market, in the short term Italian bond futures would have a higher return than U.S. bonds, but in the long term, the prices would converge. Because the difference was small, large amount of money had to be borrowed to make the buying and selling profitable.
The downfall in this system began on August 17, 1998, when Russia defaulted on its rouble debt and domestic dollar debt. Since the markets were already nervous due to the Asian crisis, investors began selling non-U.S. treasury debt and buying U.S. treasuries, which were considered a safe investment. As a result the return on U.S. treasuries began decreasing because there were many buyers, and the return on other bonds began to increase because there were many sellers. This caused the difference between the returns of U.S. treasuries and other bonds to increase, rather than to decrease as LTCM was expecting. Eventually this caused LTCM to fold, and a bailout had to be arranged to prevent a collapse in confidence in the economic system.
An ironic footnote is that they were right long-term (the LT in LTCM), and a few months after they folded their portfolio became very profitable. However the long-term does not matter if you cannot survive the short-term, and that they failed to do.
Source: adapted by the editor from Wikipedia, the free encyclopedia under a copyleft GNU Free Documentation License (GFDL) from the article "Arbitrage."
Crosswords: Arbitrage |
| English words defined with "arbitrage": arb, arbitrager, arbitrageur ♦ risk arbitrage ♦ takeover arbitrage. (references) |
| Specialty definitions using "arbitrage": aggressive investment strategy, arbitrage pricing theory ♦ conversion arbitrage ♦ discount arbitrage ♦ reversal arbitrage, reverse conversion. (references) |
| Non-English Usage: "Arbitrage" is also a word in the following languages with English translations in parentheses. Dutch (arbitration), French (adjudgment, adjudication, arbitrage, arbitral, arbitrament, arbitration), German (arbitrage), Swedish (arbitrage). |
| Domain | Title | ||
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Source: compiled by the editor from various references; see credits. | |||
| Subject | Topic | Quote |
Civil Liberties | Kyrgyz Republic | In June Osh Television prevailed in the Supreme Arbitrage Court. (references) |
Economic History | Moldova | Link-Trading brought the case to the arbitrage court operated by the Stockholm Chamber of Trade. (references) |
Slovak Rep | Slovakia is a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitrage Awards. (references) | |
Political Economy | NIGERIA | At the same time the government sought to stabilize the Naira which encouraged widespread improper behavior by financial institutions and others who sought to take advantage of attractive currency arbitrage opportunities. (references) |
Source: compiled by the editor from ICON Group International, Inc.; see credits. | ||
| "Arbitrage" is generally used as a noun (singular) -- approximately 96.24% of the time. "Arbitrage" is used about 213 times out of a sample of 100 million words spoken or written in English. Its rank is based on over 700,000 words used in the English language. Some parts-of-speech are not covered due to the samples used by the British National Corpus. (note: percents less than one-hundredth of one percent have been omitted) |
| Parts of Speech | Percent | Usage per 100 Million Words | Rank in English |
| Noun (singular) | 96.24% | 205 | 21,272 |
| Lexical Verb (base form) | 1.88% | 4 | 175,879 |
| Noun (proper) | 1.41% | 3 | 202,518 |
| Lexical Verb (infinitive) | 0.47% | 1 | 339,140 |
| Total | 100.00% | 213 | N/A |
Source: compiled by the editor from several corpora; see credits.
| Country | Name |
| France | ABC Arbitrage |
| (more examples...) |
Source: compiled by the editor from Icon Group International, Inc.
Expressions using "arbitrage": arbitrage dealer ♦ arbitrage pricing theory ♦ conversion arbitrage ♦ discount arbitrage ♦ fixed income arbitrage ♦ reversal arbitrage ♦ risk arbitrage ♦ takeover arbitrage. Additional references. | |
| Hyphenated Usage | |
Beginning with "arbitrage": arbitrage-free. | |
Ending with "arbitrage": no-arbitrage. | |
| Source: compiled by the editor from various references; see credits. | |
| The following statistics estimate the number of searches per day across the major English-language search engines as identified by various trade publications. Hyperlinks lead to commercial use of the expression at Amazon.com. |
| Language | Translations for "arbitrage"; alternative meanings/domain in parentheses. | |
Albanian | shitje e njëkohshme në disa tregje. (various references) | |
Arabic | موازنة (comparison). (various references) | |
Bulgarian | арбитраж (arbitrament, arbitration). (various references) | |
Chinese | 套利. (various references) | |
Czech | arbitráž (arbitration, conciliation). (various references) | |
Danish | arbitrage (arbitration, switch, switching), omplacering (arbitration, redeployment, switch, switching). (various references) | |
Dutch | arbitrageverrichting, arbitrage (arbitration). (various references) | |
Finnish | arbitraasi (arbitration, arbitration of exchange, switch, switching). (various references) | |
French | arbitrage (arbitral, arbitrament, arbitration). (various references) | |
German | arbitrage (arbitration, switch, switching). (various references) | |
Greek | πρόκριση συναλλαγής ή συναλλάγματος (arbitration, switch, switching), διαιτησία (arbiter, arbitration, refereeing, umpiring). (various references) | |
Hungarian | arbitrázs, külföldi pénzüzletek, külföldi üzletek, döntőbírói ítélet (arbitrament), döntőbíráskodás (arbitration). (various references) | |
Italian | arbitraggio (arbitration, switch, switching). (various references) | |
Pig Latin | arbitrageay.(various references) | |
Portuguese | arbitragem cambial (arbitration, switch, switching), arbitragem (arbitrament, refereeing), troca (commutation, exchange, interchange, passage, permutation, reciprocation, shift, swap, swop, transposition). (various references) | |
Russian | арбитраж (arbitrament, arbitration). (various references) | |
Spanish | arbitraje (arbitrament, arbitration). (various references) | |
Swedish | arbitrage (arbitration, switch, switching). (various references) | |
Turkish | arbitraj. (various references) | |
Ukrainian | третейський суд (arbitration), арбітраж (arbitrament, arbitration). (various references) | |
Vietnamese | sự buôn chứng khoán. (various references) | |
| Source: compiled by the editor from various translation references. | ||
Derivations | |
Words beginning with "arbitrage": arbitraged, arbitrager, arbitragers, arbitrages, arbitrageur, arbitrageurs. (additional references) | |
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"Arbitrage" is suggested in spellcheckers for the following: arbitage, arbitrament, arbotrage, arbritage, armitrage. (additional references) | |
| Source: compiled by the editor, based on several corpora (additional references). | |
| Words rhyming with "arbitrage" (pronounced 'Ar"bi*trage'): Fratrage, Ultrage. (additional references) |
Scrabble® Enable2K-Verified Anagrams | |
| Words within the letters "a-a-b-e-g-i-r-r-t" | |
-2 letters: arbiter, barrage, rarebit. | |
-3 letters: abater, aigret, airbag, artier, baiter, barite, barret, barter, begirt, errata, gaiter, garret, garter, grater, irater, ratbag, rebait, terbia, triage. | |
-4 letters: abate, agate, agria, airer, atria, barer, barge, barre, begat, biter, briar, brier, giber, grate, great, irate, rabat, rater, reata, rebar, rerig, retag, retia, riata, taber, taiga, targe, tarre, terai. | |
| Words containing the letters "a-a-b-e-g-i-r-r-t" | |
+1 letter: arbitraged, arbitrager, arbitrages. | |
+2 letters: arbitragers, arbitrageur. | |
+3 letters: arbitrageurs. | |
+4 letters: gubernatorial, heartbreaking, recalibrating. | |
+5 letters: autobiographer, halterbreaking, prefabricating, quarterbacking, rebroadcasting. | |
| Source: compiled by the editor from various references; see credits. SCRABBLE® is a registered trademark. All intellectual property rights in and to the game are owned in the U.S.A and Canada by Hasbro Inc., and throughout the rest of the world by J.W. Spear & Sons Limited of Maidenhead, Berkshire, England, a subsidiary of Mattel Inc. Mattel and Spear are not affiliated with Hasbro. | |
| 1. Definition 2. Crosswords 3. Usage: Commercial 4. Quotations: Non-fiction | 5. Usage Frequency 6. Names: Company Usage 7. Expressions 8. Expressions: Internet | 9. Translations: Modern 10. Derivations 11. Rhymes 12. Anagrams | 13. Bibliography |
Copyright © Philip M. Parker, INSEAD. Terms of Use.
