What Is Arbitrage?

Arbitrage is the technique of investing in two assets (going long one and short the other) and assuming that the prices will converge over time. This is made possible as a result of market inefficiencies, although as technology advances more and more these inefficiencies are likely to be smaller and to be eliminated faster. True arbitrage is meant to be risk free profit but in reality it very very rarely is. Due to the fact that any profit from arbitrage is likely to be small, traders and investors will put in vast amounts of money to magnify returns. The most famous example of arbitrage is that of Long Term Capital Management, the quant-based hedge fund which started off selling new US government bonds and buying older ones, and taking the profits as the prices converged. Hedge funds which operate an event driven strategy will often work on the basis of merger arbitrage, i.e. that the stock prices of companies will converge if they complete a merger deal.

To learn more about this concept and become a master at LBO modeling, you should check out our LBO Modeling Course. Learn more here.

Module 1: Introduction

Module 2: LBO The Big Picture

Module 3: Valuation and Transaction Assumptions

Module 4: Sources and Uses: The Theory

Module 5: Sources and Uses: Application to Nike Case

Module 6: P&L Projections & LBO Adjustments

Module 7: Debt Schedule

Module 8: Balance Sheet and Adjustments

Module 9: Taxes

Module 10: Exit, Returns, & Sensitivity Analysis

Bonus Module A) Purchase Price Accounting

Bonus Module B) Dividend Recap

Bonus Module C) Add-on Acquisition Build

Learn More Here

Related Terms

Return to the Finance Dictionary

Read Forum Topics About Arbitrage

 

Start Discussion

Popular Content See all

Chose Evercore over GS & MS for Full Time - Did I make the right choice?
+30IBby Prospective Monkey in Investment Banking - Mergers and Acquisitions">Prospect in IB-M&A
Meeting Girls Right Now?
+19OFFby Vice President in Investment Banking - Generalist">VP in IB - Gen
Worst Mistake you've ever made in an interview? Can it beat mine
+18IBby Intern in Investment Banking - Generalist">Intern in IB - Gen
Dating in IB
+14IBby Intern in Investment Banking - Generalist">Intern in IB - Gen
Is it worth leaving banking if I have it pretty good already
+12IBby 1st Year Analyst in Investment Banking - Industry/Coverage">Analyst 1 in IB - Ind

Total Avg Compensation

October 2020 Investment Banking

  • Director/MD (18) $713
  • Vice President (51) $332
  • Associates (266) $228
  • 3rd+ Year Analyst (38) $163
  • 2nd Year Analyst (148) $159
  • Intern/Summer Associate (137) $141
  • 1st Year Analyst (587) $130
  • Intern/Summer Analyst (562) $82

Leaderboard See all

1
LonLonMilk's picture
LonLonMilk
98.4
2
Jamoldo's picture
Jamoldo
98.3
3
Secyh62's picture
Secyh62
98.2
4
CompBanker's picture
CompBanker
97.9
5
redever's picture
redever
97.7
6
Addinator's picture
Addinator
97.6
7
bolo up's picture
bolo up
97.5
8
NuckFuts's picture
NuckFuts
97.5
9
frgna's picture
frgna
97.5
10
Edifice's picture
Edifice
97.3