In the financial world, an arbitrage represents the purchase of securities on one market for immediate resale on another market in order to profit from a price discrepancy. This results in immediate risk-free profit. In the currency market, for example: if $1.00 in U.S. currency buys 0.7 British pounds currency, £1 in British currency buys 9.5 French francs, and 1 French franc buys 0.16 in U.S. dollars, then an arbitrage trader can start with $1.00 and earn $1.064 thus earning a profit of 6.4 percent. It seems pretty simple and easy, but it is actually fairly complicated and rare.
Arbitrage is possible when one of three conditions is met: The same asset does not trade at the same price on all markets, two assets with identical cash flows do not trade at the same price, and/or an asset with a known price in the future does not today trade at its future price.
Although the term, arbitrage, is mainly applied to in financial instruments, such as bonds, stocks, derivatives and currencies, it can also be used in the world of sports betting. Today, there are many internet bookmakers who offer odds on the outcome of the same
event. Each bookmaker weighs their odds so that no one customer can cover all outcomes at a profit against their books. However, in order to remain competitive their margins are usually fairly low. Different bookmakers may offer different odds on the same outcome of a given event; by taking the best odds offered by each bookmaker, a customer can under some circumstances cover all possible outcomes of the event and assure that they receive a small risk-free profit. This profit would typically be between 1% and 5% but can be much higher.
It seems too good to be true, right? Well, no form of gambling is entirely risk-free. Despite the fact that it is often advertised as risk-free profit, there are a lot problems associated with arbitrage betting. The majority of arbitrage opportunities are limited to only a few per cent at best which wouldn't be a problem if the customer were allowed to bet as much as he wants, but bookmakers often limit maximum bets. Another problem is that there are often deposit and withdrawal costs which have the potential to negate any profit that may have been made. Postponed sporting events can also cause problems because some bookmakers will cancel the bet, thus the customer may end up only having money on one side of the bet.
The constantly changing prices that can occur probably cause the biggest problems, especially for beginnings. An 'arb' usually last for less than an hour and typically only a few minutes. If the better does not get in immediately, the opportunity is lost. Although sports arbitrage can be profitable, it takes capital, time, organization and energy to make consistent profits. It is important to develop processes that enable the better to act upon opportunities immediately. There are several software packages available that actually seek out these arb opportunities.
Copyright 2006 Timothy Rohrer
Tim Rohrer is an established author and business owner. To learn how to generate risk free profits with an arbitrage system, visit http://www.profitmasterworld.com
