Back
Arbitrage
A strategy to take advantage of temporary price imbalances between two markets, between two maturities on the same market, or between equivalent commodities or financial assets. The objective of an arbitrage transaction is to make a profit without taking on much risk by purchasing commodities or financial assets that are relatively underpriced and simultaneously selling identical or similar commodities or financial assets that are relatively overpriced.
(1) There are basically two types of arbitrage involving derivatives: (i) the first aims to take advantage of discrepancies between the price of a derivative on the forward market and the price of the underlying on the spot market (basis trade); (ii) the second aims to take advantage of discrepancies between the price of the derivatives themselves, for example between the price of a call option and the price of a put option on the same underlying, between the prices of the same derivative on different markets or between the prices of similar derivatives.
(2) By exploiting these discrepancies, arbitrage contributes to eliminating them.