Arbitrage – What is arbitrage?

Arbitrage is the practice of purchasing an asset at one price and immediately reselling it for a higher price in a different market

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The practice of arbitrage involves the purchase and resale of assets in order to generate profit: in other words, it means taking advantage of a price difference between multiple markets. The term is most commonly applied to the financial investment trading of assets such as bonds, stocks and derivatives, but can also be applied to any situation where one can match deals that capitalise on imbalanced market prices.

Arbitrage is the result of inefficiencies in the market and helps to ensure that prices do not deviate substantially from their fair market value for long.

Arbitrageurs

Individuals or businesses that engage in arbitrage are called ‘arbitrageurs’. Arbitrageurs are usually banks or brokerage firms, but can also be other companies or individuals depending on the situation.

Arbitrage today

Significant advances in technology have made it very difficult to profit from arbitrage today due to pricing errors in the market – especially when it comes to computerised sales and trading systems. Most companies have automated monitors to track fluctuations in the prices of financial instruments and products, which means that inefficient pricing setups are usually corrected immediately, eliminating the opportunity for arbitrage.

Negative arbitrage

Conversely, negative arbitrage occurs when the purchase and resale of an asset results in a loss and also a lost financial opportunity – specifically in the case of investments.

For example: if a company sells bonds with a 5% interest rate for £10 million, and then reinvests that £10 million at 4% (because they cannot get a higher rate), the company has lost 1% of interest that could have been retained or earned. This is a lost opportunity because the reinvested money earns less than what is needed to pay off any debt.

Assets in Debitoor

Although you’re hopefully not planning to get involved in arbitrage, it is still important to keep track of the value of your company’s assets. Record both tangible and intangible assets in your account, and let Debitoor automatically keep track of value depreciation.