Cyclopædia of Political Science, Political Economy, and the Political History of the United States
ARBITRAGE. In banking and commercial matters, arbitrage or arbitration of exchange is resorted to in order to discover, by comparison and calculation the profit which may result from the negotiation of bills of exchange on different places—This process is either simple or complex. The simple process is of more general application, because there is little speculation in money changes which extend to more than three places.
—Simple arbitrage is a comparison of the course of exchange between two places, relatively to the course established between these two places and a third; that is to say, the rate of exchange between two places being known, arbitrage consists in comparing this rate with that prevailing at the third place, in order to ascertain to which of the three it is most advantageous to make the remittances to be made.
—A complex arbitrage consists in comparing the course of exchange of more than three places, with a view to ascertain what a remittance shall cost in the last which has passed through all the others. In fact, a complex arbitrage is the repetition of several simple arbitrages, and can be solved only through a series of operations in the rule of three.
—Arbitrage in the case of goods takes place especially when the price of a certain commodity at a certain place being known, it is sought to ascertain what price the commodity will bring in another market; and consequently what price should be asked for it there, so as to realize a profit. In this case, there are charges made for handling and transferring the goods to be taken into account. The merchant who is not in a position himself to reckon these expenses, particularly when his business relations extend to markets far distant from his place of residence, usually has these expenses estimated by his correspondents.
—Arbitrages are very useful, as they tend more and more to keep in balance the rate of values between different countries.
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