Arbitrage

A SIMPLE definition of arbitrage comes from http://Investorwords.com: “Attempting to profit by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.”

Arbitrage is possible because markets are driven by imperfect information. It is therefore possible for the same security to have one value in New York and a slightly different value in London. When dealing with large amounts of securities, a difference of a fraction of a cent can yield substantial profits for the clever arbitrageur.

The classic, almost risk-free form of arbitrage is taking advantage of small differences in the pricing of foreign currencies. Let's say that one dollar in United States currency is considered equivalent, today, to 0.85 euros. One euro is trading for 260 Hungarian forints. And ...