Arbitrage
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| - | '''Low-cost country sourcing''' (LCCS) is [[procurement]] strategy in which a company sources materials from countries with lower [[Workforce|labour]] and production costs in order to cut [[operating expense]]s. LCCS falls under a broad category of procurement efforts called [[global sourcing]]. | ||
| - | The process of low-cost sourcing consists of two parties. The customer and the supplier countries like US, UK, Canada, Australia, and West European nations are considered as [[high-cost countries]] (HCC) whereas resource rich and regulated wage labor locations like [[China]], [[India]], [[Indonesia]], [[Bolivia]], [[Brazil]], [[Russia]], [[Mexico]], and [[East Europe]]an nations are considered [[low-cost countries]] (LCC). In low-cost-country sourcing the material ([[Product (business)|product]]s) flows from LCC to HCC while the [[technology]] flows from HCC to LCC. | + | In [[economics]] and [[finance]], '''arbitrage''' ({{IPAc-en|ˈ|ɑːr|b|ᵻ|t|r|ɑː|ʒ}}, {{small|UK also}} {{IPAc-en|-|t|r|ɪ|dʒ}}) is the practice of taking advantage of a price difference between two or more [[Market (economics)|markets]]: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the [[market price]]s. When used by academics, an arbitrage is a (imagined, hypothetical, thought experiment) transaction that involves no negative [[cash flow]] at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For example, an arbitrage opportunity is present when there is the opportunity to instantaneously buy something for a low price and sell it for a higher price. |
| - | The primary principle behind LCCS is to obtain sourcing efficiencies through identifying and exploiting cost [[arbitrage]] between geographies. | + | In principle and in academic use, an arbitrage is risk-free; in common use, as in [[statistical arbitrage]], it may refer to ''expected'' profit, though losses may occur, and in practice, there are always [[#Risks|risks]] in arbitrage, some minor (such as fluctuation of prices decreasing profit margins), some major (such as devaluation of a currency or derivative). In academic use, an arbitrage involves taking advantage of differences in price of a ''single'' asset or ''identical'' cash-flows; in common use, it is also used to refer to differences between ''similar'' assets ([[relative value (economics)|relative value]] or [[convergence trade]]s), as in [[merger arbitrage]]. |
| - | Aside from price other reasons for engaging in global sourcing can include improved manufacturing capacity/ time frames, quality of goods, improved customer services and logistics benefits. | + | People who engage in arbitrage are called '''arbitrageurs''' {{IPAc-en|ˌ|ɑːr|b|ᵻ|t|r|ɑː|ˈ|ʒ|ɜːr}}—such as a bank or brokerage firm. The term is mainly applied to trading in [[financial instrument]]s, such as [[Bond (finance)|bonds]], [[stock]]s, [[Derivative (finance)|derivatives]], [[Commodity|commodities]] and [[Currency|currencies]]. |
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| + | Arbitrage has the effect of causing prices of the same or very similar assets in different markets to converge. | ||
| ==See also== | ==See also== | ||
| - | *[[Global sourcing]] | + | |
| - | *[[International trade]] | + | ===Types of financial arbitrage=== |
| - | *[[Offshore company]] | + | * [[Arbitrage betting]] |
| - | *[[Offshore outsourcing]] | + | * [[Covered interest arbitrage]] |
| - | *[[Offshore software R&D]] | + | * [[Fixed income arbitrage]] |
| - | *[[Offshoring]] | + | * [[Political arbitrage]] |
| - | *[[Resource curse]] | + | * [[Remarketing arbitrage]] |
| + | * [[Risk arbitrage]] | ||
| + | * [[Statistical arbitrage]] | ||
| + | * [[Triangular arbitrage]] | ||
| + | * [[Uncovered interest arbitrage]] | ||
| + | * [[Volatility arbitrage]] | ||
| + | |||
| + | ===Related concepts=== | ||
| + | * [[Airline booking ploys]] | ||
| + | * [[Algorithmic trading]] | ||
| + | * [[Arbitrage pricing theory]] | ||
| + | * [[Coherence (philosophical gambling strategy)]], analogous concept in [[Bayesian probability]] | ||
| + | * Cointelation | ||
| + | * [[Drop shipping]] | ||
| + | * [[Efficient-market hypothesis]] | ||
| + | * [[Immunization (finance)]] | ||
| + | * [[Interest rate parity]] | ||
| + | * [[Intermediation]] | ||
| + | * [[No free lunch with vanishing risk]] | ||
| + | * [[TANSTAAFL]] | ||
| + | * [[Value investing]] | ||
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In economics and finance, arbitrage (Template:IPAc-en, Template:Small Template:IPAc-en) is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a (imagined, hypothetical, thought experiment) transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For example, an arbitrage opportunity is present when there is the opportunity to instantaneously buy something for a low price and sell it for a higher price.
In principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may refer to expected profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor (such as fluctuation of prices decreasing profit margins), some major (such as devaluation of a currency or derivative). In academic use, an arbitrage involves taking advantage of differences in price of a single asset or identical cash-flows; in common use, it is also used to refer to differences between similar assets (relative value or convergence trades), as in merger arbitrage.
People who engage in arbitrage are called arbitrageurs Template:IPAc-en—such as a bank or brokerage firm. The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives, commodities and currencies.
Arbitrage has the effect of causing prices of the same or very similar assets in different markets to converge.
See also
Types of financial arbitrage
- Arbitrage betting
- Covered interest arbitrage
- Fixed income arbitrage
- Political arbitrage
- Remarketing arbitrage
- Risk arbitrage
- Statistical arbitrage
- Triangular arbitrage
- Uncovered interest arbitrage
- Volatility arbitrage
Related concepts
- Airline booking ploys
- Algorithmic trading
- Arbitrage pricing theory
- Coherence (philosophical gambling strategy), analogous concept in Bayesian probability
- Cointelation
- Drop shipping
- Efficient-market hypothesis
- Immunization (finance)
- Interest rate parity
- Intermediation
- No free lunch with vanishing risk
- TANSTAAFL
- Value investing
