What does the concept of arbitrage involve?

The concept of arbitrage involves the simultaneous purchase and sale of an asset in different markets. This practice takes advantage of price discrepancies in order to generate a profit. When an asset is priced differently in two markets, an arbitrageur can buy it at a lower price in one market and sell it at a higher price in another. This process helps to bring prices into alignment across markets, as the buying and selling activities increase demand in one market and supply in the other, thus correcting the price difference.

Arbitrage plays a crucial role in ensuring market efficiency, as it ensures that assets are appropriately priced relative to one another in different venues. The essence of arbitrage is that it requires no risk; the transactions occur simultaneously, locking in the profit without exposure to market variability during the time it takes to execute the buy and sell orders. This distinct characteristic sets arbitrage apart from other investment strategies, which may involve greater risks and uncertainties.