Arbitrage

In its strictest definition, arbitrage is defined as the activity of simultaneously buying and selling a portfolio or collection of assets that provides a guaranteed, or riskless, positive cash flow when the present total cost of the portfolio is zero or less. This cash flow return to the arbitrageur, without risking any of his or her own funds, is sometimes portrayed in the popular press as ill-gotten gains or somehow parasitic in nature to the market process in general. However, as this entry will show, the actions of arbitrageurs actually help correct a seemingly small asset “mispricing” toward an accurate single price for market participants to confidently transact, rather than leave open the possibility for an even greater mispricing where investors could be hurt (overpaying ...