International Arbitrage

Definition

The term international arbitrage refers to the practice of simultaneously buying and selling a foreign security on two different exchanges. International arbitrage is profitable when pricing inefficiencies occur due to factors such as timing and exchange rates.

Explanation

While stock exchanges are considered efficient markets, there are instances when the mispricing of one or more securities provides the opportunity for profits through techniques such as international arbitrage. This approach requires the trader to monitor the price of securities on two or more exchanges located throughout the world.

International arbitrage is considered a low-risk strategy, since the trades should only occur when the price differential between the two exchanges is large enough to cover the associated transaction fees. Profitable price differentials can be attributed to factors such as time zone differences between exchanges and exchange rate lag. The most common example of this strategy is the simultaneous buying and selling of an International Depository Receipt (IDR) and the same stock registered in a foreign country.

Related Terms

statistical arbitrage, selling short against the box, arbitrage bonds, stale price arbitrage, discount arbitrage