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Arbitrage Knowledge Base

Understand arbitrage across crypto, futures, options, pairs and ETFs. Explore worked examples, pricing relationships, execution costs and practical risks.

Mechanics & mathematicsHypothetical examples

What Is It?

Arbitrage compares the prices of positions with equivalent economic cash flows. In the ideal model, an arbitrage requires no net investment, cannot lose across admissible outcomes, and has a positive payoff in at least one outcome. Real trading adds bid–ask spreads, funding constraints, uncertain fills and counterparty exposure.

This knowledge base connects replication arguments to the mechanics of actual markets. It separates contractual payoff relationships from statistical convergence trades, and quoted pricing gaps from realizable net profit. Start with a market you know, then follow the related strategies to see which assumptions carry across markets.

How It Works

A useful comparison begins with units, dates and settlement. A BTC conversion cycle returns to its starting currency. A dated basis position offsets a spot asset against a matched futures exposure. An options replication must match underlying, strike, expiry, exercise style and contract multiplier. Two similar-looking prices need not represent equivalent claims.

Competition tends to narrow inconsistencies as traders buy cheaper claims and sell richer equivalents. Differences can persist because capital is costly, inventory is scarce, quotes are stale or the positions cannot be traded simultaneously. Pairs trading adds a separate assumption: a historical relationship will continue to mean-revert.

The tools linked in these guides include connection-dependent dashboards and historical analytics. Check the stated data source, current connection and any simulated-data flags. Convexity is covered as an educational relationship without a dedicated scanner. Article coverage alone does not imply a live tool or a planned release.

Mathematical Formula

\Pi_{\mathrm{net}}=\Pi_{\mathrm{gross}}-C_{\mathrm{trading}}-C_{\mathrm{funding}}-C_{\mathrm{borrow}}-C_{\mathrm{slippage}}

Measure every term in the same currency at the same valuation date. Avoid subtracting a spread twice if it is already embedded in executable buy and sell prices.

V_0(A)=V_0(B)\quad\text{if}\quad X_t(A)=X_t(B)\ \text{for every cash-flow date and state}

The law of one price presumes feasible replication, compatible credit and settlement, and comparable access to financing. It is a model condition, not a promise about a displayed spread.

Worked Example

Illustrative prices · not market data

Suppose two simultaneously tradable claims pay the same $100 in one year, with the same credit and settlement terms.

Buy the cheaper claim at an executable ask of $96.00 and sell the richer at a bid of $96.40.
The initial gross credit is $0.40. Assume $0.15 of combined commissions and other costs, measured today.
The net initial credit is $0.25; the matched future payments cancel in the ideal replication.

If selling the rich claim is prohibited, the quotes cannot be filled together, or collateral costs exceed $0.25, this is no longer an executable arbitrage. Similarity of historical returns alone would not establish the matched-payoff premise.

Execution Considerations

Establish the instrument specification and executable quantity before comparing prices. Reconcile fees, lot sizes, collateral, settlement currency and cash-flow timing. Then stress partial fills and adverse price moves while legs are incomplete.

Read the individual scanner's status rather than inferring availability from the presence of a link. A signal is a screening result; verify current order books, data quality and account permissions independently.

Risks & Limitations

Theoretical equality does not remove liquidity, margin, operational or counterparty risk. A broker can demand cash before a hedged asset can be liquidated or transferred.

Statistical arbitrage, including pairs trading and proxy ETF convergence, can lose even when every intended trade fills. Structural relationships and estimated parameters may change.

Frequently Asked Questions

Is every price difference an arbitrage?

No. Different maturity, credit, settlement, dividends or exposure can justify different prices. A trade needs an appropriate replication or a separately acknowledged statistical hypothesis.

Do these articles contain live opportunities?

No. Worked examples use hypothetical prices and stated assumptions. Existing dashboards are linked with their data and connection limitations.

Where should I start?

Triangular arbitrage introduces conversion direction and fees. Put–call parity introduces replication. Pairs trading explains why statistical convergence is a different kind of risk.

Platform Availability

The individual guides link to existing dashboards and analytics with their actual data limitations. No live connection, executable fill or future scanner is implied by the educational content.

References & Further Reading

Background sources for the concepts above. Apply the assumptions stated in this guide to each formula.

Educational material only; not investment advice or an offer to trade. Examples are hypothetical. Trading involves execution, financing and capital-loss risks; no return is guaranteed.