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Conclusion

Invest no money, take no risk, and make profits. While this sounds like the recipe for a money machine, this is how you can describe pure arbitrage. For pure arbitrage to exist, you need two assets with exactly the same cash flows trading at different prices. Buying the lower-priced asset and selling the higher-priced asset will allow you to lock in the price difference as a certain profit; the cash flows on the two assets exactly offset each other, resulting in a riskless investment. Pure arbitrage opportunities, if they exist, are most likely to be found in futures and options markets and will almost certainly be small and fleeting. Only investors with significant information or execution advantages are likely to be able to take advantage of them.

In near arbitrage, you have two almost identical assets trading at different prices, but significant restrictions prevent the prices of the two from converging. A closed-end fund that trades at a significant discount on the market value of the securities that it owns would be one example. If you could buy the entire fund at the market price and liquidate its securities, you should be able to make a hefty profit. Unfortunately, restrictions on liquidating the fund may reduce you to holding shares in the fund and hoping that the discount gets smaller over time.


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