In the strictest sense, arbitrage refers to the simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.
Arbitrage exists as a result of market inefficiencies. It provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. Given the advancement in tech-nology, it has become extremely difficult to profit from mispricing in the market. Many traders have computerised trading systems set to monitor fluctuations in similar financial instruments. Any in-efficient pricing set-ups are usually acted upon quickly and the opportunity is often eliminated in a matter of seconds.
For example, Guardian Holdings Limited is listed on both the Jamaica and Trinidad and Tobago stock exchanges. On Friday, April 8, Guardian shares closed at J$160 per share on the JSE, or around US$1.83 per share, given an average exchange rate of around J$85.86 per US dollar. On the same date, Guardian shares closed at TT$15 on the TTSE or around US$2.34 per share, given an exchange rate of TT$6.41 to the US dollar. An arbitrage oppor-tuinity would appear to exist to purchase Guardian shares in Jamaica and sell them in Trinidad. How and why these anomalies appear to exist and persist is another whole story.