Die Heuning Pot Literature Guide
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Finance Glossary

Just call us Bond. Amortized bond.

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Arbitrage

Definition:

A sure thing. Easy money. No sweat. That's what arbitrage is... or at least is supposed to be. It's a great word to use at cocktail parties so you should know what it means. Arbitrage is the business of finding gold for sale in Spain for $1,302.50 per ounce when you know buyers in the U.S. who will pay $1,303 per ounce. Arbitrage is "riskless profit". In the deal above, you're pocketing 50 cents an ounce which doesn't seem like much but if you bought and sold 2 tons, that's 16 x 4,000 x $.50 = $32,000...not bad for a few phone calls.

With the advent of high-tech global electronic trading, the opportunities for "arbing" have fallen drastically. Note also that there are usually commissions and/or overhead costs involved in making these deals so there must be a pretty wide spread in prices for it to be worth the arbers while to deal. See alligator spread for details.

Consider it this way: in the gold example above, what if a teeny tiny commission of just 0.1% (that's one tenth of one percent) had to be paid on the transaction on each side? You only made 50 cents an ounce to begin with. A 0.1% transaction cost would be $1.30+ on either side. The commish completely destroys the "arb opportunity" in the trade. Arb is not arb until the check clears and cash actually shows up in your account.

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