ssure drives up the price of one investment and selling pressure drives down the price of the other. Arbitrageurs can make money, but not much and not for long from any one situation" (Sharpe, 1991, 390).
The concept of arbitrage, especially in application, is closely related to the concept of hedging, and an understanding of arbitrage requires an understanding of the relationship between arbitrage and hedging. Arbitrage, as has been noted, consists of buying and selling the same item at the same time, but in two or more different markets (Rees, 1991, 19). As has also been noted, in finance, arbitrage also applies between two different securities which have a close relationship, such as the convertibility of one security into the other.
Hedging is an action or a series of actions taken by either a buyer or a seller to protect assets against a change in prices (Rees, 1991, 210). In practical applications, the concept of hedging works much like the concept of arbitrage. The following illustrations describe t
...