Explanation: The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.
For example:
Shares of ABC Ltd. May be quoted at Rs.100 in the cash market, whereas it may be quoted at Rs.103 in the futures market. This deviation gives rise to an arbitrage opportunity, which traders tend to capitalize upon.
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