Arbitrage Theory

Arbitrage Theory involves taking advantage of price differences for the same asset across different markets or in different forms. When an asset is priced lower in one market and higher in another, traders can buy it cheaply and sell it where the price is higher, making a risk-free profit. This process helps align prices across markets, ensuring consistency and efficiency. Arbitrage opportunities arise temporarily, typically disappearing as traders act quickly. It plays a vital role in maintaining market equilibrium and influences how prices are set in financial systems.