In business economics, investment and sports, arbitrage  is the practice of taking benefit from a cost difference between several markets: striking a variety of matching deals that capitalize upon the difference, the gain being the difference relating to the market prices.

When employed by academics, an arbitrage is usually a transaction which involves no negative cash flow at any probabilistic or temporal state as well as a positive income in at least one state; simply, it’s the probability of a risk-free profit at zero cost.

In principle as well as in academic use, an arbitrage is risk-free; in common use, for example statistical arbitrage, it may relate to predicted profit, though losses may happen, and in practice, there are always risks in arbitrage, some minor (for example change of prices decreasing profit margins), some major (including devaluation of the currency or derivative).

In academic use, an arbitrage involves taking advantage of differences in cost of a single asset or identical cash-flows; in common use, it’s also utilized to focus on differences between similar assets (relative value or convergence trades), as in merger arbitrage.

People who take part in arbitrage are known as arbitrageurs for instance a bank or brokerage firm. The word is principally related to trading in financial instruments, which include bonds, stocks and shares, derivatives, products and currencies.

Specific sport arbitrage has also recently become practical due to the use of online bookmakers offering widely diverging odds on sports setting up situations where it is easy to place bets that cannot lose.

And even though this involves bookmakers it is far from gambling as there is no risk on the initial stake which can not be lost. This is known as ‘Arbitrage Betting‘ or ‘Matched Betting‘

Arbitrage is not simply the act of purchasing an item in a single market and selling it in another for a higher price at some later time. The deals must take place simultaneously in order to avoid exposure to market risk, or perhaps the risk that prices may change on a single market before both dealings are completed.

In realistic terms, this is generally only possible with securities and financial products that may be traded electronically, and even then, when each leg of your trade is implemented the values sold in the market could have moved.

Missing one of the legs of the trade (and subsequently having to trade it soon after at a worse price) is known as ‘execution risk’ or more specifically ‘leg risk’.

“True” arbitrage necessitates that there be no market risk concerned.