What is arbitrage?

Arbitrage refers to exploiting price differences between various 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 classic arbitrage: This involves securing a certain profit by simultaneously going long in one security and short in another, often in different markets. This is done to profit from price or interest rate differences with limited risk.
• Statistical arbitrage: This form uses complex mathematical models to profit from price differences (inefficiencies). This is based on the assumption 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 applied by hedge funds and market makers through computer-controlled investing.