Arbitrage

Arbitrage is basically buying a security in one market and simultaneously selling it in another
market at a higher price, profiting from a temporary difference in prices. This is considered
riskless profit for the investor/trader.

The absence of arbitrage is achieved when two securities or portfolios with identical cash
flows have the same price or the profit is equal to zero is called no-arbitrage

In the context of the stock market, traders often try to exploit arbitrage opportunities. For example,
a trader may buy a stock on a foreign exchange where the price has not yet adjusted for the
constantly fluctuating exchange rate. The price of the stock on the foreign exchange is therefore
undervalued compared to the price on the local exchange, and the trader can make a profit from
this difference.