arbitrage

Well, there are many ways in which one could define “arbitrage”. The strictest concept of arbitrage is what is called “academic arbitrage”. In academic arbitrage, it is possible to trade to generate a riskless profit without investment. For example, assume that futures contracts on the S&P CNX Nifty start trading at the Singapore Exchange (SGX) and that there are no barriers to trading across exchanges or countries. If one month Nifty futures trade at 4560 on NSE and at 4570 on the Singapore Exchange, a trader could enter into the following two transactions simultaneously:Buy 2000 Nifties on the NSE for Rs 4560Sell 2000 Nifties on the SGX for Rs 4570
These two transactions would generate a riskless profit of Rs 20000. Since both trades are assumed to occur simultaneously, there is no investment. Such an opportunity qualifies as an academic arbitrage opportunity - that is, it affords riskless profits without investment.
Obviously, in well-functioning markets, such opportunities rarely exist. If they did, it would mean that we would all become rich using this continuous money-generating device. It’s like money being left on the street without being claimed. And we all know that this does not happen. Arbitrage opportunities however do exist for very brief periods,and get instantly wiped out as investors buy/sell in the hope of making arbitrage profits.
Arbitrage opportunities also exist when the same product sells at two different prices across time (after accounting for time value of money).
This can also be thought of as a technique for riskless lending of funds to the market