What is arbitrage in financial markets?

Arbitrage in financial markets refers to the simultaneous buying and selling of identical or equivalent securities in different markets to take advantage of price discrepancies. This concept relies on the principles of market efficiency, where discrepancies in pricing occur due to market imperfections.

When an arbitrageur identifies a situation where the same asset is priced differently in two markets, they will buy it at the lower price in one market and sell it at the higher price in another. This strategy allows for a risk-free profit, as the transactions occur simultaneously, thereby eliminating the risk of price fluctuations.

This understanding of arbitrage is crucial in finance, as it highlights the dynamics of market pricing and the actions traders can take to exploit inefficiencies. In contrast, the other options do not align with the definition of arbitrage; buying high and selling low is a loss-making strategy, selling assets with no intention to buy them back indicates a speculative or venture approach, and investing in non-liquid assets does not actively involve price discrepancies in the same way that arbitrage does.