Arbitrage

Definition: Attempting to profit by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.

The ideal version is riskless arbitrage.

The simplest example of arbitrage is a shop keeper or market trader: Buying a product at a price, and then selling it at a higher price.

The same principle applies to FOREX, you buy Euro with your Dollar when the Euro is weaker than the Dollar. And then you sell your Euros and buy Dollars when the Dollar is weaker than the Euro and the margin of difference is your profit.

You buy a house and your mortgage repayments are, (for the sake of an argument) $1,000.00 USD per month. You then rent the house at a monthly rate of $1,200.00 USD.

Your profit is $200.00USD per month. Although I would not consider this an ideal arbitrage as it is not risk free, the people that rented the property could default on the rent, cause damage to the property and you still have the rigmarole of getting them evicted.

There are many forms of arbitrage the above is just a small example, but you should get an idea of what can be considered as arbitrage.

No arbitrage is entirely risk free; although theoretically it can appear to be risk free, outside influences entirely beyond your control can cause problems; especially if you are dealing in a volatile fast moving program. Power cuts, computer hangs, (frozen screens), computer crashes, software crashes and, if you are under pressure; accidently clicking on the wrong option could cause you great losses. It could be as little as only a 10 – 15 second delay between your arbitrage returning a profit or, a loss.