Arbitrage is the practice of exploiting price differences of the same asset in different markets to make a risk-free profit. It plays a crucial role in financial markets by ensuring price efficiency and liquidity, as traders buy low in one market and sell high in another.

Arbitrage

price differences

the same asset

different markets

Risk-free profit refers to the theoretical return on an investment with zero risk, often associated with government bonds in stable economies. It is crucial for financial models as a benchmark to evaluate the performance of risky investments and to calculate the risk premium.

risk-free profit

Financial markets are platforms where individuals and institutions can trade financial securities, commodities, and other fungible items at prices that reflect supply and demand. They play a crucial role in the economy by facilitating liquidity, price discovery, and the efficient allocation of resources.

financial markets

price efficiency

Liquidity refers to the ease with which an asset can be converted into cash without affecting its market price. High liquidity in markets ensures that transactions can be executed quickly and with minimal price fluctuations, enhancing market stability and investor confidence.

liquidity

traders

buy low

sell high

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