Arbitrage

"The practice of simultaneously buying and selling an asset in different markets to profit from a price difference; or ..."

Definition

The practice of simultaneously buying and selling an asset in different markets to profit from a price difference; or more broadly, exploiting a discrepancy between systems, regulations, or information

⭐ Significance for UPSC

Important for GS3 (economy, financial markets). Two key forms: (1) Financial arbitrage, buying cheap in one market, selling expensive in another; (2) Regulatory arbitrage, using looser rules in one jurisdiction to avoid stricter ones elsewhere. SEBI regularly flags arbitrage strategies in the derivatives market.

Example / Context

Regulatory arbitrage, where companies exploit differences between jurisdictions' laws, has become a major concern for international tax authorities trying to curb profit shifting by multinationals.

Mains GS Relevance

GS Paper 3

Economy, Environment, S&T, Security

Subject