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An Arbitrage is a deal that produces risk-free profits by exploiting a mispricing in the market. A simple example is when a trader can buy an asset cheaply in location and simultaneously arrange to sell it at another location for a higher price. Since such opportunities are unlikely to exist for a long time, and since arbitrageurs would rush to buy the asset in the cheap location, the price gap will close very fast.
In the derivatives business, arbitrage opportunities typically arise because a product can be assembled in different ways out of different building blocks. If it is possible to sell a product for more than it costs to buy the constituent parts, then the risk free profit can be generated. In practice, the presence of transaction costs often means that only the large market players can profit from such opportunities.
In fact, many of these so called arbitrage deals constructed in the financial markets are not entirely risk free. They are designed to exploit differences in the market prices of products which are very similar but not completely identical. For this very reason, they are also called as "Relative Value" Trades
What else can I help you with?
What are the Recent measures initiated by the government towards developing a derivatives market in India?
developing a derivatives market in india
How do you pronounce 'arbitrageur'?
ahr-bi-trah-zher
What is the difference between commodity market and normal market?
Normal market ( Equity or Stock Market ) deals with trading of company shares , their and their index derivatives , mutual funds and bonds. Commodity market deals with the derivatives of physical commodities ( Metals , Edibles etc )
About derivatives market you mean the exacltly definition of derivative market?
the derivative market means the the price of particular product in the market is fluctuating time by time.
What is features of derivative market?
Derivatives market is the market where derivative products are traded. It has a great demand all over the world with the US Derivatives market being the largest in the world. The prices of derivative products are determined based on the price movement of the underlying asset. Derivatives are extremely risky and are not for the novice investors. Some of the derivative products that are available in the derivatives market are: a. Futures b. Forwards c. Options d. Swaps e. Swap Options f. Basket Trades g. etc
Who buys derivatives?
The derivatives market serves the needs of several groups of users, including those parties who wish to hedge, those who wish to speculate, and arbitrageurs.
Who are the participants in a derivatives market?
There are four main types of participants in any Derivatives Market. They are: 1. Dealers 2. Hedgers 3. Speculators and 4. Arbitrageurs A point to note here is that, the same individuals and organizations may play different roles under different market circumstances
What are the two major financial market-traded forms of financial derivatives?
Futures and options
What are three sectors of Financial market?
The three main sectors of the financial market are the equity market, the debt market, and the derivatives market. The equity market involves the buying and selling of stocks, representing ownership in companies. The debt market, or bond market, deals with the issuance and trading of debt securities, such as government and corporate bonds. The derivatives market encompasses financial instruments whose value is derived from underlying assets, including options and futures contracts.
Why is derivatives important?
the simply meaning of derivative is a market which is helps to minimized the risk of loss. and the main objective if any business is to bring maximized profit to company so that's the reason to derivatives is important.
How derivatives work in a foreign exchange market?
In the foreign exchange (FX) market, derivatives are financial instruments whose value is derived from the underlying currency pairs. Common types of FX derivatives include forwards, futures, options, and swaps, which allow traders to hedge against currency risk or speculate on exchange rate movements. For example, a forward contract locks in a specific exchange rate for a future date, helping businesses manage exposure to fluctuating rates. Overall, derivatives enhance liquidity and provide flexibility for market participants in managing their foreign exchange risk.
What are marketing securities?
Marketable securities are stocks, bonds, and derivatives which are sold and bought in a public market such as a stock exchange.
