Arbitrage

Arbitrage is the practice of taking advantage of a price difference between two or more markets. It can yield a profit generated by the difference between the market prices. In commodity markets, if the difference in price between the futures and spot prices exceeds the actual cost to carry of the commodity, speculators will have the opportunity for a risk-free profit through arbitrage. Speculators will buy the undervalued cash market commodity and sell the overvalued futures contract of the commodity. This will be done until the spread between prices in both markets equals the cost to carry. Arbitrage in this fashion is very uncommon.