Chartered Financial Analyst (CFA) Level 1 Practice Exam 2025 – The All-in-One Guide to Exam Success!

Arbitrage refers to the practice of taking advantage of price discrepancies for the same asset in different markets. When an investor engages in arbitrage, they simultaneously purchase an asset at a lower price in one market while selling it at a higher price in another market. This process allows the investor to lock in a profit without incurring significant risk, as the transactions occur simultaneously.

The essence of arbitrage is the ability to identify and exploit inefficiencies in the market. Such opportunities arise due to factors like differences in supply and demand, information asymmetries, or temporary anomalies. This strategy is crucial in maintaining market efficiency, as it helps equalize prices across different markets over time.

Given that other options are focused on different aspects of financial transactions—like the buying and selling of securities in a single market, hedging against risks, or long-term investment strategies—they do not accurately capture the definition of arbitrage as it is understood in finance. Therefore, the characterization of arbitrage as the simultaneous purchase and sale of an asset in different markets to profit from price discrepancies is the most accurate description of the concept.