Arbitrage is the process of buying assets in one market and selling them in another to profit from price differences. True arbitrage is both riskless and self-financing. In today’s modern financial markets with ultra-fast supercomputers riskless arbitrage rarely exists. Arbitrage strategies still work, but they’re often not risk-free. These strategies include (but not limited to):
- Statistical arbitrage (pairs, basket trading): mostly involves equities and other instruments whose payoffs are linear.
- Volatility arbitrage: involves different classes of options on a single or multiple underlyings. The payoffs of those options are not linear, i.e. they have convexities.
- Convertible arbitrage: consists of a hybrid (equity + debt) instrument and a hedge.
- Sport arbitrage: refers to inter-market arbitrage. It can also mean profiting from a bookmaker’s mispricing of sport matches.