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Arbitrage

This relates to the deliberate switching of funds between markets in order to maximize net gains on short-term investments. Dealings may be in currencies. commodities or bills of exchange. A person acting in this specialized business field may buy, say, a quantity of rice or deutschmarks three months forward and then invest the due purchase price payable in another commodity or currency. He will do so where he will receive a higher return on that investment than he will need to cover his forward transaction.

Arbitrage is not considered to rank with pure speculation, though the line of demarcation is somewhat indistinct, when it is conducted op a genuine business basis. It can serve the smooth running of international, or national, trade and commerce, if only by making funds available in the right place at the right time.

Reference: The Penguin Business Dictionary, 3rd edt.