Legal Definitions - arbitrage

Arbitrage refers to the practice of simultaneously buying and selling an asset in different markets or in different forms to profit from a temporary difference in its price. The goal is to lock in a risk-free profit by purchasing the asset where it is cheaper and immediately selling it where it is more expensive. This strategy relies on market inefficiencies that cause the same asset to have different prices at the same moment.

• Example 1: Stock on Different Exchanges

  Imagine a company's stock, "Global Innovations Inc.," is listed on both the New York Stock Exchange (NYSE) and the Frankfurt Stock Exchange (FSE). Due to a momentary delay in information flow or a slight imbalance in trading activity, Global Innovations Inc. shares are trading at $50.00 on the NYSE, but simultaneously at an equivalent of $50.05 on the FSE (after currency conversion). An investor could instantly buy 1,000 shares of Global Innovations Inc. on the NYSE for $50,000 and, at the exact same moment, sell 1,000 shares on the FSE for $50,050.

  This illustrates arbitrage because the investor is buying and selling the identical asset (Global Innovations Inc. shares) in different markets (NYSE and FSE) at the same time to profit from the price difference ($0.05 per share, totaling $50).

• Example 2: Cryptocurrency Across Platforms

  A popular cryptocurrency, "QuantumCoin," is being traded on two different online exchanges, "DigitalExchange" and "CryptoVault." For a brief period, QuantumCoin is priced at $1,200 on DigitalExchange, while it is simultaneously available for $1,203 on CryptoVault. A trader with accounts on both platforms could immediately purchase 5 QuantumCoin tokens on DigitalExchange for $6,000 and simultaneously sell those 5 QuantumCoin tokens on CryptoVault for $6,015.

  This demonstrates arbitrage as the trader exploits the price discrepancy of the same cryptocurrency across different trading platforms by buying low and selling high almost instantly, securing a profit of $15.

• Example 3: Convertible Bonds vs. Underlying Stock

  A company issues a convertible bond, which is a type of debt that can be exchanged for a fixed number of the company's common stock shares. Let's say a bond from "Tech Solutions Corp." can be converted into 50 shares of its common stock. The bond is currently trading for $4,900, but the 50 shares of Tech Solutions Corp. stock it could be converted into are collectively trading for $5,000 on the stock market ($100 per share). An investor could buy the convertible bond for $4,900, immediately convert it into 50 shares of Tech Solutions Corp. stock, and then immediately sell those 50 shares on the stock market for $5,000.

  This is an example of arbitrage because the investor is profiting from the price difference between two closely related assets (the convertible bond and the underlying stock) by buying the cheaper form and selling the more expensive form, effectively capturing a $100 profit.