Arbitrage is a financial strategy that involves exploiting price differences of the same or similar assets in different markets to make a profit. The process of arbitrage takes advantage of discrepancies in prices, exchange rates, interest rates, or other financial instruments. Arbitrage opportunities arise when the same asset is priced differently in different markets or when the cost of acquiring an asset is lower than the proceeds from selling it.

There are several types of arbitrage, each focusing on different markets and financial instruments. Here are some common forms of arbitrage:

1. **Spatial Arbitrage:**
– Involves exploiting price differences of the same asset in different geographical locations. Traders may buy the asset in a market where it is priced lower and sell it in a market where the price is higher.

2. **Temporal Arbitrage:**
– Takes advantage of price differences that occur over time. This could involve buying an asset at a lower price and selling it at a higher price after a certain period. Temporal arbitrage is often associated with securities and commodities trading.

3. **Statistical Arbitrage:**
– Involves using quantitative models and statistical analysis to identify short-term mispricings in financial instruments. Traders execute trades based on statistical relationships between securities or markets.

4. **Risk Arbitrage (Merger Arbitrage):**
– Involves taking advantage of price differentials between the current market price of a company’s stock and the expected value after a merger or acquisition. Traders may buy the stock of the target company and sell the stock of the acquiring company.

5. **Interest Rate Arbitrage:**
– Focuses on exploiting differences in interest rates between different markets or financial instruments. For example, a trader may borrow money at a lower interest rate and invest it in an instrument that offers a higher rate of return.

6. **Convertible Arbitrage:**
– Involves exploiting price differences between a company’s convertible securities (such as convertible bonds) and the underlying common stock. Traders may buy the convertible security and short sell the common stock when they believe the convertible security is undervalued.

7. **Currency Arbitrage:**
– Takes advantage of differences in exchange rates between different currency markets. Traders may buy a currency in one market where it is undervalued and simultaneously sell it in another market where it is overvalued.

8. **Commodity Arbitrage:**
– Involves exploiting price differences in commodities across different markets. Traders may buy a commodity in a market where it is priced lower and sell it in a market where the price is higher.

Arbitrage opportunities are typically short-lived, as market participants quickly recognize and exploit price discrepancies, causing prices to adjust. The efficient market hypothesis suggests that in highly efficient markets, arbitrage opportunities are rare and short-lived because prices quickly reflect all available information. Traders engaged in arbitrage need to act swiftly and have sophisticated tools and technology to capitalize on these fleeting opportunities. Additionally, arbitrage activities contribute to market efficiency by aligning prices across different markets.