Arbitrage is a financial strategy that involves taking advantage of price differences between markets. When a commodity, stock, or currency is priced differently in two or more markets, an arbitrageur buys in the cheaper market and sells in the more expensive one to profit from the difference. This process is usually very quick and requires a keen understanding of market dynamics and a fast execution to ensure profit before prices adjust to equilibrium.
The term "arbitrage" originates from the French word "arbitrer," meaning "to judge." It first came into use in the financial context in the early 20th century, referring to the practice of taking advantage of market discrepancies.