ARBITRAGE

The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly efficient markets  seldom exist, but, arbitrage opportunities are often precluded because of transactions costs.

A financial transaction where an arbitrageur (arb) simultaneously purchases in one market and sells in another where there is a slight price differential. Often it is a full hedge, and therefore, a risk-free transaction. Arbs play an important role in keeping markets liquid and efficient.

Simultaneous purchase in one market and sale in another of a security in order to make a profit on relative price differences. The difference between the interest on governmental obligations exempt from federal income tax under the Internal Revenue Code and the yield on securities and obligations that are not exempt from federal income tax in which the proceeds of the governmental obligations are invested.