Define "arbitrage" in the context of trading.

Define "arbitrage" in the context of trading.

• A. The practice of taking advantage of low market transparency
• B. The practice of buying and selling the same asset in different markets for profit
• C. The strategy of only trading during periods of high volatility
• D. The operation of changing one currency for another

Answer: (B)

In the context of trading, "arbitrage" refers to the practice of buying and selling the same asset in different markets to exploit price discrepancies and generate a profit. This occurs when an asset is available at different prices in various locations or markets. A trader engaging in arbitrage will purchase the asset at the lower price and simultaneously sell it at the higher price, thus securing a risk-free profit from the difference in prices. The efficiency of modern markets often leads to rapid corrections in price discrepancies, making arbitrage strategies challenging yet potentially lucrative when executed properly. This practice is fundamental in ensuring market efficiency as it helps align prices across different markets.

In the context of trading, "arbitrage" refers to the practice of buying and selling the same asset in different markets to exploit price discrepancies and generate a profit. This occurs when an asset is available at different prices in various locations or markets. A trader engaging in arbitrage will purchase the asset at the lower price and simultaneously sell it at the higher price, thus securing a risk-free profit from the difference in prices.

The efficiency of modern markets often leads to rapid corrections in price discrepancies, making arbitrage strategies challenging yet potentially lucrative when executed properly. This practice is fundamental in ensuring market efficiency as it helps align prices across different markets.