meaning of riskless arbitrage betting

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Meaning of riskless arbitrage betting betting record app for iphone

Meaning of riskless arbitrage betting

The reason is that part 2. An unexpired lottery ticket that someone lost and that you found is not a riskless arbitrage because winning is not a certainty. However, it is a risky arbitrage because there is a state of the world in which there is a large positive payoff, that in which you have the winning number. So people would be as happy owning A as they were by owning B. We would be happy too, because we got it cheap relative to B.

The short sale of B has been closed out by covering the short sale. The long position we acquired in A has been liquidated by using A to cover the short sale, after which we own no position in A nor in B. Further, if we short sell B and purchase A fast enough, the immediate cash flow will be almost riskless.

Now, recall definition 2 of riskless arbitrage given in Chapter 4, section 4. Risk-Free Arbitrage Definition 2 A risk-free arbitrage opportunity is one with the following properties: 1. When we compare it with almost everything else in economics, the wonderful thing about this law of valuation by analogy is that it dispenses with utility functions, the undiscoverable hidden variables whose ghostly presence permeates economic theory.

Financial economists like to recast the Law of One Price as the more pedantically named Principle of No Riskless Arbitrage : Any two securities with identical future payoffs, no matter how the future turns out, should have identical current prices. See quantum electrodynamics quanta quantum electrodynamics QED : accuracy of atomic physicists and as best theory in world complexity of as genuine theory history of light and as metaphor quantum dreams and renormalization and quantum field theory quantum mechanics quarks race: in South Africa radioactive beta decay, theory of Rainwater, James Rand, Ayn random walk randomness: EMM and risk and theory of real estate: financial models and See also apartments reality reason regulation relativity, theory of renormalization research: principles of return: average Black-Scholes Model and CAPM and EMM and excess expected financial models and return cont.

The general thesis Marcopolos advances is that for Madoff to have outdone the returns the market permits for riskless arbitrage , he would have had to deviate from it and consistently made bets that were winners for nearly months, consecutively. Madoff had seven months in which he claimed losses of less than 1 percent.

Zeroing in on periods of time when the market was pricing options such that riskless arbitrage was essentially inoperable, such as the Asian currency crisis, he concluded the likelihood of Madoff not having suffered more than a few skin lacerations is statistically almost impossible. It could also be said it was strange he never hit the cover off the ball if he had needed to deviate from riskless posturing during such unusual market conditions. While selection of and access to funds with high returns is a key determinant of the success of funds of funds, an equally large selling point for them is usually their procedures for due diligence how well they kick the tires.

The most amazing part of the Madoff affair is that experienced hands in the industry which practiced the investment strategy Mr. When practiced in its purest form, it involves buying and selling calls, puts, and an underlying equity such that risk of price movement is hedged away. Under these circumstances the market has long offered essentially Treasury bill type returns, because arbitrage has narrowed spreads since at least the s.

Brownian motion , buy low sell high , capital asset pricing model , compound rate of return , discrete time , incomplete markets , law of one price , market clearing , Myron Scholes , Pareto efficiency , risk tolerance , riskless arbitrage , short selling , stochastic process. To avoid degeneracies, we require: 1. We already know from 1. Arbitrage will force the returns on all riskless assets to be equal in equilibrium, so this situation is equivalent economically to the introduction of a riskless asset later.

If any particular asset should offer a higher expected return due solely to the increase in the quantity outstanding, investors will soon arbitrage away such profit opportunities. If there are perfect substitutes and frictionless markets, buying a highexpected-return asset while selling a substitute with a lower expected return constitutes a riskless arbitrage.

Subsequent empirical studies disputed the notion that perfect substitutes exist. Demand effects may play a key role in explaining time-varying risk premia, given the lack of substitutes for market risk exposures. Even the substitutability of single stocks can be challenged. Frictions related to illiquidity, funding constraints, and trading costs, as well as counterparty risk, agency concerns, and other information problems can be first-order important, as the experience shows.

Bearish expectations, elevated risk, and risk aversion do not alone explain the distressed price levels of securitized bonds and other assets. Many financial intermediaries and investors became forced sellers as market frictions prevented them and other investors from taking advantage of good deals or nearly riskless arbitrage opportunities.

Opportunities that appeared compelling over the long horizon could not be taken due to the possibility that further de-levering and related mark-to-market volatility would make the investment positions unsustainable over the short run. A diverse literature on market frictions explains why asset prices might deviate from fair values or respond sluggishly to new information. Next, I discuss the literature on value and momentum strategies which initially focused on the U.

Cross-sectional trading strategies may be relatively value-oriented buy low, sell high or momentum-oriented buy rising stocks, sell falling ones; essentially buy high, sell low —and they may be applied within one market say, equities or across many asset markets.

Micro-inefficiency refers to either the rare extreme case of riskless arbitrage opportunities or the more plausible case of risky trades and strategies with attractive reward-to-risk ratios. Cross-sectional opportunities are safer to exploit than market-directional opportunities—one can hedge away directional risk and diversify specific risk much more effectively.

Like the convertible arbitrage strategy, the closed-end fund arbitrage was indifferent to the direction of the market, generating profits as the gap between the unit price and the underlying value narrowed. It was not, however, classic riskless arbitrage. As it was possible for a gap to open up between the price of the mutual fund unit and the underlying value of the portfolio, it was also possible for that gap to widen.

When it did so, an investor who had bought the units of the fund and sold short the underlying portfolio endured short-term, unrealized losses until the market closed the gap. Hence it is useful to assume that investors are rational in the long run and to analyze economic issues on the basis of this assumption. In Britain, a practice has developed in which highly experienced "key men" employ others to place bets on their behalf, so as to avoid detection and increase accessibility to retail bookmakers and allow the financiers or key arbitragers to stay at a computer to keep track of market movement.

Arbitrage is a fast-paced process and its successful performance requires much time, experience, dedication and discipline, and especially liquidity. There are a number of potential arbitrage deals. Below is an explanation of some of them including formulas and risks associated with them. The table below introduces a number of variables that will be used to formalise the arbitrage models. This type of arbitrage takes advantage of different odds offered by different bookmakers. For an example of an event with only two possible outcomes e.

They offer the following fixed-odds gambling on the outcomes of the event in both fractional and decimal format:. Bookmaker 1 will in this example expect to earn 5. For an individual bookmaker, the sum of the inverse of all outcomes of an event will always be greater than 1.

The idea of arbitrage betting is to find odds at different bookmakers, where the sum of the inverse of all the outcomes are below 1, meaning that the bookmakers disagree on the chances of the outcomes. This discrepancy can be used to obtain a profit. When there are more than two possible outcomes the value of the subsequent bets can be calculated with respect to the lowest quoted odds.

Reducing the risk of human error is vital being that the mathematical formula is sound and only external factors add "risk". Numerous online arbitrage calculator tools exist to help bettors get the math right. For arbitrages involving three outcomes e. Betting exchanges such as Smarkets have opened up a new range of arbitrage possibilities since on the exchanges it is possible to lay i. Arbitrage using only the back or lay side might occur on betting exchanges.

It is in principle the same as the arbitrage using different bookmakers. Arbitrage using back and lay side is possible if a lay bet on one exchange provides shorter odds than a back bet on another exchange or bookmaker. However, the commission charged by the bookmakers and exchanges must be included into calculations. Back-lay sports arbitrage is often called "scalping" or "trading". Scalping is not actually arbitrage, but short-term trading.

In the context of sports arbitrage betting a scalping trader or scalper looks to make many small profits, which in time can add up. In theory a trader could turn a small investment into large profits by re-investing his earlier profits into future bets so as to generate exponential growth.

Scalping relies on liquidity in the markets and that the odds will fluctuate around a mean point. A key advantage to scalping on one exchange is that most exchanges charge commission only on the net winnings in a particular event, thus ensuring that even the smallest favorable difference in the odds will guarantee some profit.

They typically demand that this amount is wagered a number of times before the bonus can be withdrawn. In this way the bookmakers wagering demand can be met and the initial deposit and sign up bonus can be withdrawn with little loss. The advantage over usual betting arbitrage is that it is a lot easier to find bets with an acceptable loss, instead of an actual profit. Since most bookmakers offer these bonuses this can potentially be exploited to harvest the sign up bonuses.

By signing up to various bookmakers, it is possible to turn these "free" bets into cash fairly quickly, and either making a small arbitrage, or in the majority of cases, making a small loss on each bet, or trade.

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When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs.

Horse racing systems betting favorites In the s, risk arbitrage was common. Given the complexity of the calculations involved and the convoluted structure that a convertible bond can meaning of riskless arbitrage betting, an arbitrageur often relies on sophisticated quantitative models in order to identify bonds that are trading cheap versus their theoretical value. I think the arbitrage added about 5 percent to 6 percent to the risk-free rate. Help Learn to edit Community portal Recent changes Upload file. Bookmaker 1 will in this example expect to earn 5.
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Meaning of riskless arbitrage betting 36
Binary options 360 volunteer Betting arbitrage "miraclebets", "surebets", sports arbitrage is an example of arbitrage arising on betting markets due to either bookmakers' differing opinions on event outcomes meaning of riskless arbitrage betting errors. Frictions related to illiquidity, funding constraints, and trading um msu betting line, as well as counterparty risk, agency concerns, and other information problems can be first-order important, as the experience shows. When it did so, an meaning of riskless arbitrage betting who had bought the units of the fund and sold short the underlying portfolio endured short-term, unrealized losses until the market closed the gap. More controversially, officials of the Federal Reserve assisted in the negotiations that led to this bail-out, on the grounds that so many companies and deals were intertwined with LTCM that if LTCM actually failed, they would as well, causing a collapse in confidence in the economic system. Like the convertible arbitrage strategy, the closed-end fund arbitrage was indifferent to the direction of the market, generating profits as the gap between the unit price and the underlying value narrowed. Main article: Long-Term Capital Management. Under Definition 1, you get something later for certain for nothing today.
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Arbitrage is a necessary force in the financial marketplace. To understand more about this concept and different types of arbitrage, read Trading the Odds With Arbitrage. As a simple example of arbitrage , consider the following. Types of arbitrage include risk, retail, convertible, negative, statistical, and triangular, among others. Though this is not the most complicated arbitrage strategy in use, this example of triangular arbitrage is more complex than the above example.

In triangular arbitrage , a trader converts one currency to another at one bank, converts that second currency to another at a second bank, and finally converts the third currency back to the original at a third bank. The same bank would have the information efficiency to ensure all of its currency rates were aligned, requiring the use of different financial institutions for this strategy. You see that at three different institutions the following currency exchange rates are immediately available:.

Next, you would take the 1,, euros and convert them to pounds at the 1. Next, you would take the pounds and convert them back to U. Stock Trading. Advanced Forex Trading Concepts. Your Money. Personal Finance. Your Practice. Popular Courses. What Is Arbitrage? Key Takeaways Arbitrage is a type of trade in which a security, currency, or commodity is nearly simultaneously bought and sold, in different markets.

The purpose of arbitrage is to take advantage of the difference in prices available for the same financial instrument being offered on different exchanges. The most amazing part of the Madoff affair is that experienced hands in the industry which practiced the investment strategy Mr. When practiced in its purest form, it involves buying and selling calls, puts, and an underlying equity such that risk of price movement is hedged away.

Under these circumstances the market has long offered essentially Treasury bill type returns, because arbitrage has narrowed spreads since at least the s. Brownian motion , buy low sell high , capital asset pricing model , compound rate of return , discrete time , incomplete markets , law of one price , market clearing , Myron Scholes , Pareto efficiency , risk tolerance , riskless arbitrage , short selling , stochastic process.

To avoid degeneracies, we require: 1. We already know from 1. Arbitrage will force the returns on all riskless assets to be equal in equilibrium, so this situation is equivalent economically to the introduction of a riskless asset later. If any particular asset should offer a higher expected return due solely to the increase in the quantity outstanding, investors will soon arbitrage away such profit opportunities. If there are perfect substitutes and frictionless markets, buying a highexpected-return asset while selling a substitute with a lower expected return constitutes a riskless arbitrage.

Subsequent empirical studies disputed the notion that perfect substitutes exist. Demand effects may play a key role in explaining time-varying risk premia, given the lack of substitutes for market risk exposures. Even the substitutability of single stocks can be challenged. Frictions related to illiquidity, funding constraints, and trading costs, as well as counterparty risk, agency concerns, and other information problems can be first-order important, as the experience shows.

Bearish expectations, elevated risk, and risk aversion do not alone explain the distressed price levels of securitized bonds and other assets. Many financial intermediaries and investors became forced sellers as market frictions prevented them and other investors from taking advantage of good deals or nearly riskless arbitrage opportunities.

Opportunities that appeared compelling over the long horizon could not be taken due to the possibility that further de-levering and related mark-to-market volatility would make the investment positions unsustainable over the short run. A diverse literature on market frictions explains why asset prices might deviate from fair values or respond sluggishly to new information. Next, I discuss the literature on value and momentum strategies which initially focused on the U.

Cross-sectional trading strategies may be relatively value-oriented buy low, sell high or momentum-oriented buy rising stocks, sell falling ones; essentially buy high, sell low —and they may be applied within one market say, equities or across many asset markets. Micro-inefficiency refers to either the rare extreme case of riskless arbitrage opportunities or the more plausible case of risky trades and strategies with attractive reward-to-risk ratios.

Cross-sectional opportunities are safer to exploit than market-directional opportunities—one can hedge away directional risk and diversify specific risk much more effectively. Like the convertible arbitrage strategy, the closed-end fund arbitrage was indifferent to the direction of the market, generating profits as the gap between the unit price and the underlying value narrowed. It was not, however, classic riskless arbitrage.

As it was possible for a gap to open up between the price of the mutual fund unit and the underlying value of the portfolio, it was also possible for that gap to widen. When it did so, an investor who had bought the units of the fund and sold short the underlying portfolio endured short-term, unrealized losses until the market closed the gap. Hence it is useful to assume that investors are rational in the long run and to analyze economic issues on the basis of this assumption.

Ragnar Nurkse summarized his survey of changes in the values of the French franc and the German mark in the s with the statement that speculation in the currency market had been destabilizing. Since you had gotten off to such a good start with the fund, did you consider the possibility of building that into a career instead of getting a job?

I thought I had more to learn. What was your first investment based job? After my first and only year at law school, I took a summer job trading options at Bear Stearns. Did you know anything about options at that point? No, I ended up doing forward conversions, which are a riskless arbitrage. The option market was that inefficient at the time? No, interest rates were that high at the time. I think the arbitrage added about 5 percent to 6 percent to the risk-free rate.

Frankly, the trading was kind of mechanical. I had to run to the other side of floor to get a printout of option prices to see what options were setting up attractively relative to the stock. If one were to employ a bet fraction of 0.

This is what happens to an arbitrageur with good information who uses too much leverage. An arbitrage transaction based on securities that do not conform to this ideal necessarily involves risk. When a broad class of assets, such as all stocks, become overpriced, as they did in the spring of , there is no substitute security to use as the long-side hedge to a short sale of the entire stock market.

TR: I read that you got back in the market, selling options, then going into arbitrage. I was a hotshot guy.

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The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly efficient markets seldom exist. The purchase of securities on one market for immediate resale on another market in order to profit from a price or currency discrepancy. An alternative model to the capital asset pricing model developed by Stephen Ross and based purely on arbitrage arguments.

A portfolio manager invests dollars in an instrument denominated in a foreign currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for dollars. Taking advantage of divergences in exchange rates in different money markets by buying a currency in one market and selling it in another market. Speculation on perceived mispriced securities, usually in connection with merger and acquisition deals.

A self-funding, self-hedged series of transactions that generally utilize mortgage securities as the primary assets. An asset whose future return is known today with certainty. The risk free asset is commonly defined as short-term obligations of the U. The rate earned on a riskless investment, typically the rate earned on the day U. Treasury Bill. A self-funding, self-hedged series of transactions that usually utilize mortgage securities as the primary assets.

Striking offsetting deals among three markets simultaneously to obtain an arbitrage profit. Related to : financial, finance, business, accounting, payroll, inventory, investment, money, inventory control, stock trading, financial advisor, tax advisor, credit.

Financial Terms. Riskless arbitrage. A trader can take a long position in secondary market along with a simultaneous short position in futures market making a potential profit at maturity irrespective of the direction of movement. There are two main types of futures arbitrage strategies — long the basis and short the basis. Being long the basis means being long the price difference between spot price and futures price. Opposite of this is short the basis where you are short the price difference between spot price and futures price.

This type of arbitrage is capable of giving a risk free profit but the profit margin is very small. For this it requires low commissions and large trading amount. But as this is a formula driven strategy, it requires no market analysis and can be executed via algorithmic trading. This strategy is used by many directional and market neutral credit hedge funds. Mispricing opportunities can arise between equity and debt or sub bonds and senior bonds or equity and credit default swaps or bank debt and bonds.

One of the most common examples of capital structure arbitrage is exploiting the differences between equity markets and credit default swaps. It takes into account the lead lag relationship between the prices of two markets. This type of arbitrage is a market neutral strategy which exploits the price differences between spot market and futures market in order to make a risk free profit.

For this strategy to be profitable the futures price must be higher than the spot price. Cash carry arbitrage strategy can be executed by taking a long position in underlying asset and a simultaneous short position in the futures contract of the same underlying asset. This strategy has a risk associated with the expenses involved in physically carrying the asset until maturity.

The opposite of this strategy is reverse cash carry arbitrage which can be executed by taking a short position in an asset and a long position in futures market for the same asset. This strategy will be profitable only if the futures price is less than the spot price. Fixed income arbitrage is mainly used by investment banks and hedge funds which aim to profit from the interest rate anomalies between different fixed income securities like municipal bonds, corporate bonds, government bonds, mortgage backed securities , interest rate swaps and credit default swaps.

Fixed income arbitrage is a market neutral strategy and can be executed by taking opposite positions in two different fixed income securities. This type of arbitrage strategy requires that the securities are similar to each other and have sufficient liquidity. Relative value arbitrage exploits price anomalies between related financial instruments like stocks and bonds. In this strategy a trader can buy a relatively underpriced security and simultaneously sell a relatively overpriced security thereby profiting from the difference in the relative value of two securities.

Relative value arbitrage is most commonly used by hedge funds which use leverage to amplify the returns. The popular trading strategy used to achieve this type of arbitrage is known as pairs trading which involves taking a long and a short position in two different assets which are highly correlated to each other. Forex swap arbitrage refers to taking advantage of interest rate differential between two countries by simultaneously buying and selling currencies of those countries. When a trader buys or sells a currency pair, he is essentially borrowing first currency in order to lend second currency.

The opportunity for swap arbitrage arises when a trader can take forex position without paying swap rates. The trader can eliminate the market risk involved by taking a position with first broker that pays swap and taking an opposite position with second broker that does not credit or debit swap. Options arbitrage can be initiated either between two options or between an option and the underlying asset.

Synthetic options are very common in this type of arbitrage. When a trader feels that a call option is overpriced in relation to put option then he can sell a naked call and offset the same by buying a synthetic call. Option traders also use conversions when options are overpriced in relation to underlying asset and reversals when options are underpriced in relation to underlying asset. Dividend arbitrage, box spread, calendar spread and butterfly spread are examples of strategies used for options arbitrage.

In this type of arbitrage traders can take advantage of the differences in gold prices at two different locations. Traders can buy gold at one location where the price is less and sell it at another location where the price is higher thereby pocketing the difference. Arbitrage opportunity also rises when there is a difference between spot price and futures price of gold.

A trader can take a long position by buying physical gold and an equivalent short position in gold futures market and settling both positions at maturity. Tax arbitrage is a technique of making profits by taking advantage of the differences in tax rates, tax systems or tax treatments in same country.

Different transactions are taxed in different ways which creates opportunities for individuals to restructure their transactions in order to pay the least amount of tax. Tax arbitrage is also possible due to different tax systems or tax rates in different countries or jurisdictions. Businesses can take advantage of such differences by maximizing the deductions in a high tax region and minimizing the taxes in a low tax region.

Negative arbitrage is a lost opportunity due to higher borrowing cost and lower lending costs. Negative arbitrage occurs when a person gets lower returns on his investments but has to finance the debt at higher interest rates. Latency arbitrage is mostly associated with high frequency trading and it refers to the fact that different people or firms get market data at different times. These time differences are known as latencies. These differences can be as small as a nanosecond but they are crucial in the world of high speed trading.

Latency arbitrage occurs when the high frequency trading algorithms earn profit by making trades split second before other traders. Rental arbitrage is a strategy of leasing a property on a long-term basis and then renting it on a short-term basis on different rental websites or vacation rental platforms. The success of rental arbitrage is highly dependent on the difference between short-term and long-term rental prices in the property market.

Credit card arbitrage is a simple process of borrowing money from the credit card company at low interest rate and then investing the same money in high yield savings account resulting in a risk less profit. Just like a bank, credit card holder can profit from the interest rate spread between money paid and money received provided he makes all the minimum payments and repays the full balance before expiry period.

Regulatory arbitrage is a process of taking advantage of loopholes in order to avoid unfavorable regulations. This type of arbitrage can be achieved by using financial engineering, restructuring transactions or geographical relocation to more favorable jurisdictions. For example, a company can relocate its headquarters to a region which has favorable regulations and lower taxes in order to save the cost and increase the profits.

Volatility plays an important role in pricing of options. Volatility arbitrage can be achieved when there is a difference between implied volatility and realized volatility of an option. A trader can profit by buying an option when the volatility is low and selling it when the volatility is high.

Location arbitrage, also known as spatial arbitrage or inter market arbitrage is mostly associated with cryptocurrency trading or forex trading. A trader can profit from location arbitrage strategy by buying a currency on one exchange at lower rate and selling it on another exchange at higher rate and pocketing the difference.

Time arbitrage occurs when there is a difference between the short-term price of a stock and its long-term price forecast. Most of the investors have a short-term horizon which creates a mispricing for the assets in the long-term. This creates an opportunity for time arbitrage for an investor with long-term horizon. Yield curve arbitrage, also known as interest rate arbitrage is a form of fixed income arbitrage trading strategy.

In this type of arbitrage a trader exploits the relative mispricing along the yield curve due to difference in demand for selected maturities. Bond prices and interest rates move in opposite directions. Changes in interest rates can have significant impact on bond prices. If the bond prices do not change quickly enough to reflect changing interest rates then we can have an opportunity for interest rate arbitrage.

US treasury is the biggest issuer of debt securities. Newly issued securities are known as on the run whereas the securities which are already issued and outstanding are known as off the run. Traders can take advantage of the convergence of spreads as there is a difference in the yields of new and old securities. Retail arbitrage is a very simple concept. You can buy products from your local retail store at a certain price and sell the same products on an online marketplace for higher price.

The difference between buying and selling price is your profit. Crude oil arbitrage is a very popular trading strategy in the energy sector to profit from the price discrepancies in Brent and WTI. This strategy involves buying or selling Brent and simultaneously taking an opposite position in WTI.

Private capital markets are not very transparent and can provide you with arbitrage opportunities. Multiple arbitrage is a strategy of increasing the value by buying and selling the same company without making any operational improvements. In other words, you are arbitraging the multiple at which the company is traded. Multiple arbitrage strategy is very complicated and is used by strategic buyers and private equity firms to take advantage of the differences in asset valuations.

Information arbitrage is a technique of using more information, better understood information and better used information to identify the trends and opportunities and capitalizing on them. In other words, information arbitrage can be used to make accurate predictions about the future requirements of customers. Riskless arbitrage is an act of buying and selling an asset immediately and generating the profit from price difference.

Riskless arbitrage does not require any investment and does not have a rate of return as the asset is sold immediately. Political arbitrage is a strategy of trading securities or assets by taking advantage of knowledge about future political activity. Political arbitrage is mostly specific to a country or a region. For example, government elections in any country can give rise to political arbitrage opportunities specific to that country. The idea of institutional arbitrage is to deliberately do something that you think the institutional investors or majority of market participants are unlikely to do.

For example, maintaining a long-term horizon or maintaining a concentrated portfolio or maintaining an appropriate level of cash in your portfolio. Beta is a measure of how systemic risk is calculated for a stock. Beta arbitrage is a trading strategy where you take a long or short position in low beta stocks and an equivalent opposite position in high beta stocks. This helps in earning a positive premium and neutralizing the systematic equity risk.

Knowledge arbitrage is another way of carrying forward innovation. It is a strategy of applying what works great in one industry to another industry.