The term discount arbitrage refers to the practice of simultaneously buying a discount option and taking the opposite position in the underlying security. Discount arbitrage is considered a riskless strategy, since the trader is engaging in a covered option.
Explanation
While stock exchanges are considered efficient markets, there are instances when the mispricing of one or more securities provides the opportunity for profits through techniques such as discount arbitrage. There are two variations of this trading strategy, both of which are classified as riskless investments:
Basic Put Arbitrage: involves purchasing the right to put a security at a discount, while at the same time buying the underlying security.
Basic Call Arbitrage: involves purchasing the right to call in a security at a discount, while at the same time selling the underlying security.
The term statistical arbitrage refers to the practice of using sophisticated mathematical models to identify potential profit opportunities from a pricing inefficiency that exists between two or more securities. Statistical arbitrage requires the use of high speed computers, computational models, as well as complex trading systems.
The term against the box refers to the practice of selling short securities that are held in safekeeping or owned. Selling short against the box provided investors with a mechanism to defer paying federal income tax on a capital gain.
The term bond arbitrage refers to the practice of refinancing a higher-rate bond prior to its call date with a lower rate security. Issuing arbitrage bonds is an effective strategy when interest rates are declining.
The term stale price arbitrage refers to the ability to profit from the price of securities that do not reflect all of the available market information. Stale price arbitrage is possible because securities are traded on exchanges located in different time zones.
The term international arbitrage refers to the practice of simultaneously buying and selling a foreign security on two different exchanges. International arbitrage is profitable when pricing inefficiencies occur due to factors such as timing and exchange rates.