arbitrage

Arbitrage is the process of profiting from price differences in different markets for one and the same asset. For example if you can buy gold bullion for $800 per ounce in Toronto and sell it for $840 per ounce in Shanghai then you have made a $40 or 5% profit (excluding expenses). Arbitrage can be done in different asset classes. Another example of arbitrage is if you buy shares of certain company on London Stock Exchange and sell those shares on NYSE (New York Stock Exchange) for profit.

A classic example of arbitrage is the “Yen Carry Trade”. Because the Bank of Japan keeps interest rates artificially low in the country, traders borrow cheap yen and convert it in currencies with higher interest rates and then buy various financial instruments denominated in that currency. Parts of the cheap yens go into commodity and emerging markets too. The traders profit from the differences between their high yield investments and the low Japanese interest rates.