What is arbitrage?

Arbitrage refers to exploiting price differences between different financial markets. In the financial context, arbitrage ensures that these price differences eventually disappear or become very small.

There are two forms of arbitrage:

• Deterministic or classical arbitrage: This involves securing a guaranteed profit by simultaneously taking a long position in one security and a short position in another, often in different markets. This is done to capitalize on price or interest rate differences with limited risk.
• Statistical arbitrage: This method uses complex mathematical models to profit from price differences (inefficiencies). It assumes that prices will return to a historical average in the long term.

This process requires a lot of computing power and speed, and is often used by hedge funds and market makers through computer-driven investing.