Similar to the horse racing arbitrage , a financial arbitrage is a transaction strategy aimed at making a risk free profit . If at any point in time, the contract or share price is different then the trader could purchase at one [lower] price and sell at the other [higher] price to make an Arbitrage. e.g. Suppose that the Microsoft shares are trading on two different exchanges, and that the share price is different. i.e. On one exchange the Microsoft shares trade at £100.02 and on the other £100.00. So if I buy one share at £100.00 and sell at £100.02. have made a risk free profit of £0.02 Here, profits can be so small that they are consumed by the transaction cost. These are best left to the big institutions [who operate at high volumes].
A financial arbitrage can be obtained through options. i.e. option to buy stock at lower value then reselling at current market value.
Similarly, an arbitrage is possible through acquisitions [also known as insider trading].
Another strategy is Stock trading based on analysis of the past stock performance - risks are higher but the profits can be much larger.
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