Not to be confused with Arbitration. 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. Arbitrage” is a French word and denotes a forex арбитраж by an arbitrator or arbitration tribunal.
In modern French, “arbitre” usually means referee or umpire. If the market prices do not allow for profitable arbitrage, the prices are said to constitute an arbitrage equilibrium, or an arbitrage-free market. An arbitrage equilibrium is a precondition for a general economic equilibrium. This refers to the method of valuing a coupon-bearing financial instrument by discounting its future cash flows by multiple discount rates. By doing so, a more accurate price can be obtained than if the price is calculated with a present-value pricing approach. Arbitrage-free pricing is used for bond valuation and to detect arbitrage opportunities for investors.