Definition
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.
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 international arbitrage. This approach requires the trader to monitor the price of securities on two or more exchanges located throughout the world.
International arbitrage is considered a low-risk strategy, since the trades should only occur when the price differential between the two exchanges is large enough to cover the associated transaction fees. Profitable price differentials can be attributed to factors such as time zone differences between exchanges and exchange rate lag. The most common example of this strategy is the simultaneous buying and selling of an International Depository Receipt (IDR) and the same stock registered in a foreign country.
Related Terms
- 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.
Moneyzine EditorSeptember 21st, 2023 
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.Moneyzine EditorJanuary 4th, 2024
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.Moneyzine EditorJanuary 5th, 2024- 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.Moneyzine EditorSeptember 21st, 2023
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.Moneyzine EditorJanuary 16th, 2024
