Legal Definitions - time arbitrage

Time arbitrage refers to the strategy of profiting from a difference in the value or price of an asset or opportunity over a period of time. Unlike traditional arbitrage, which often involves simultaneous transactions in different markets, time arbitrage exploits anticipated future changes or known inefficiencies that unfold over a duration. It involves taking a position now based on a high probability or certainty of a future event that will affect value, aiming to capture the difference between the current price and a future price.

• Example 1: Merger and Acquisition Investment

  Imagine Company A announces its intention to acquire Company B for $75 per share, but the deal is expected to close in six months. Currently, Company B's stock is trading at $72 per share. An investor practicing time arbitrage might buy shares of Company B at $72, anticipating that the price will rise to $75 when the merger is finalized. The investor profits from the $3 difference per share over the six-month period, exploiting the known future event (the merger completion) and the time it takes to occur.

• Example 2: Real Estate Development Based on Future Zoning

  A real estate developer learns that a new major infrastructure project, like a highway interchange, is planned for an area currently zoned for agricultural use. They anticipate that the local government will rezone the surrounding land for commercial or residential development once the highway project is closer to completion, significantly increasing its value. The developer purchases a large parcel of this agricultural land at its current low valuation. They hold the land for several years, waiting for the rezoning to occur, and then sell it or develop it at a much higher commercial value. Their profit is derived from the increase in land value over time due to the anticipated and eventually realized zoning change.

• Example 3: Seasonal Commodity Storage

  Consider a large food distributor who knows that the price of a certain agricultural commodity, like coffee beans, typically drops significantly after harvest season due to abundant supply and then rises steadily until the next harvest. The distributor could purchase a large quantity of coffee beans immediately after harvest when prices are low. They then store these beans in their warehouses and sell them gradually throughout the year as prices increase, particularly before the next harvest. This strategy allows them to profit from the predictable seasonal price fluctuations over time, buying low and selling high over several months.