In business economics, finance and sports, arbitrage is the practice of taking advantage of a cost difference between 2 or more markets: striking a mixture of matching deals that capitalize upon the difference, the gain being the difference within the market prices.

When used by academics, an arbitrage is usually a transaction that concerns no bad cash flow at any probabilistic or temporal state plus a positive cashflow in one or more state; essentially, it’s the possibility of a risk-free profit at zero cost.

In principle and within academic use, an arbitrage is risk-free; in common use, for example statistical arbitrage, this could relate to predicted profit, though losses may take place, and in practice, there are always risks in arbitrage, some minor (such as change of prices decreasing profit margins), some major (along the lines of devaluation of a currency or derivative).

In academic use, an arbitrage involves benefiting from differences in price of a single asset or identical cash-flows; in common use, it might be utilized to mean differences between equivalent assets (relative value or convergence trades), such as merger arbitrage.

Individuals who take part in arbitrage are known as arbitrageurs perhaps a bank or brokerage firm. The phrase is primarily ascribed to trading in financial instruments, for example bonds, futures, derivatives, commodities and currencies.

Sports arbitrage has additionally recently become possible due to the availability of world-wide-web bookmakers offering up widely diverging odds on sports making situations where it’s possible to where you can’t lose

Even though this involves bookmakers it’s not gambling as there is absolutely no risk on the initial stake which can not be lost. These betting systems or betting strategies are called ‘Arbitrage Betting’ or ‘Matched Betting’

Arbitrage is not simply the act of buying an item within a market and selling it in another for a higher price at some later time. The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both trades are completed.

In practical terms, this can be generally only possible with securities and financial products which can be traded electronically, and even then, when each leg of your trade is performed the prices available in the market could have moved.

Missing one of the legs of the trade (and subsequently needing to trade it soon after at a worse price) is known as ‘execution risk’ or more specifically ‘leg risk’.

“True” arbitrage requires that there be no market risk included.