arbitrage

Vocabulary Word

Definition

'Arbitrage' is a strategy where you buy and sell the same thing in different markets at the same time to make a profit from the price difference. It's like legally making money from discrepancies in prices.

Examples in Different Contexts

In finance, 'arbitrage' refers to the practice of taking advantage of price differences in distinct markets. A hedge fund manager might say, 'We exploited arbitrage opportunities between the U.S. and European bond markets.'

Practice Scenarios

Economics

Scenario:

The discrepancy between stock prices in different markets suggests potential for equilibrium correction.

Response:

Exactly. This price discrepancy suggests that arbitrage activities would soon eliminate the price difference.

Finance

Scenario:

The divergence in bond prices across different markets presents unique profit-making opportunities.

Response:

Right, by engaging in bond arbitrage, we can exploit these price differentials for risk-free profits.