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Arbitrage is where a trader, broker or individual sees and exploits small variations in commodity prices, or currency conversion rates or the value of other financial instruments in different markets. The profit comes from buying at one price in one market and then immediately selling the same commodity in a different market for a higher price.

With currencies, traders will take advantage of small differences in conversion rates. Currency exchange rates will also play a part in commodity arbitrage, but the scope for arbitrage is reduced where commodity exchanges in different countries use a common currency (such as the US dollar).

Because the variations in values in different markets are usually quite small, it is necessary to engage in a large volume of transactions, at low transaction cost, to achieve any significant gain. Consequently, arbitrage tends mainly to be the province of trading companies rather than of individual speculators. And for more detail click and see wikipedia entry.


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