What is ‘arbitrage’?

Arbitrage is defined as the simultaneous buying and selling of an asset in different markets to profit from price discrepancies. This practice exploits variations in price for the same asset across different markets. When an asset is priced lower in one market and higher in another, a trader can buy the asset in the lower-priced market and sell it in the higher-priced market, thereby securing a profit without any significant risk, as the transactions occur at the same time.

This concept is fundamental in finance and helps ensure that prices do not diverge significantly in efficient markets, as the actions of arbitrageurs tend to bring prices in line across different venues. The strategy relies on the market's efficiency and liquidity, as successful arbitrage opportunities are often short-lived due to the rapid adjustment of prices by the market.

Other options do not adequately define arbitrage, as they focus on different aspects of trading and investment. For instance, holding investments for the long term pertains to a buy-and-hold strategy which is not reliant on immediate price discrepancies, while random buying and selling does not imply the systematic approach characteristic of arbitrage. Additionally, a risk management technique used in options trading is unrelated to the specific actions and objectives associated with arbitrage.