What Is the Difference Between a Risk-Free Transaction and an Arbitrage

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The Answer is A risk-free transaction is,as its name suggests,a transaction in which the outcome is determined at the time that the transaction is entered into;that is,the entity entering into the transaction is assured of the outcome of the transaction.An arbitrage transaction is essentially a risk-free transaction because the entity entering into the transaction essentially enters into two transactions that will occur simultaneously and ensure the outcome that the entity desires.From that standpoint,a risk-free transaction and an arbitrage transaction are the same.The difference in the two types of transactions is in how they are financed.In a risk-free transaction,the entity makes an investment or a commitment which will eventually produce the outcome that the entity desires,but the entity is required to make the investment or commitment before the results are achieved;that is,the entity must finance its participation in the transaction in some way.In an arbitrage transaction,the entity entering into the transaction buys an asset in one market at one price and sells that asset in another market at a higher price,thereby making a profit.Because the purchase and the sale are simultaneous,the transaction is self-funding (the purchase price is provided by the sale price),and no investment is required by the entity conducting the transaction.

What Is the Difference Between a Risk-Free Transaction and an Arbitrage

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