The Arbitrage Life

Ever heard of the word “Arbitrage”? A finance word it is or more specifically a trading word. It denotes a situation where there is a difference in price for a product which a trader will take advantage of by buying at a lower price and selling at a higher price.

Arbitrage can be seen as two types. Market based arbitrages and transaction based arbitrages. Market based arbitrages exploit the price difference between two markets. When a same security is listed in both BSE & NSE while BSE has a lower price for the same stock than NSE an arbitrageur will buy the stock from BSE and sell the stocks at NSE. In common world this is what exporters and importers do. They sense the price difference of a product between two countries and export from the lower priced country to the higher priced country.

In a transaction based arbitrage an arbitrageur will exploit the price difference between the basket sizes of a product. Basically it happens between wholesalers and retailers. For example a dozen of apple may cost Rs.10 and a single apple may cost Re.1. In this case a retailer will buy a dozen of apples from the wholesaler, unpack them and sell them individually to Rs.12 and packet the difference of Rs.2 as a profit.

Although seemingly it looks like a trading word, this word has more implications in other parts of life as well. In fact every activity in this world is driven by one type of arbitrage or another. Though it is very simple when we look at it, mostly we tend to overlook this amazingly common property.

Take for example rivers flow from highest regions to the lowest regions – height arbitrage. This also explains how migration happens. In job market people move from the least to most opportunistic regions, mostly from villages to cities. The Indian outsourcing industry is working on the whole basis of arbitrage advantage, lower service charges compared to western economies. So is the case with China in manufacturing prices.

The idea of gene survival is also dependent on arbitrage. A guy and girl seek each other to fulfill what they lack from self, in order to carry out the gene propagation to next generation.

In fact the whole concept of change is initiating from arbitrage. From natural activities like cyclones and volcanoes (pressure arbitrage), to the evolution of species (opportunity, threat arbitrages) everything is driven by this single seed of difference. Also the whole idea of social imbalance also rests on arbitrage. Any society that doesn't fill the difference between its classes tend to fall apart. Valleys of difference in cultures, economy, race, color had torn many societies into pieces.

This article is just a simple analogy of arbitrage into the common life. It doesn't intend to teach anything nor does it