Which practice involves exploiting price differences across markets by buying low and selling high?

• A. Hedging
• B. Speculation
• C. Arbitrage
• D. Diversification

Answer: (C)

Arbitrage is the practice of profiting from price differences across markets by buying where prices are low and selling where prices are high. These opportunities appear when the same asset trades at different prices in different places or forms, and the goal is to execute a near-simultaneous buy and sell to lock in a risk-free (or very low-risk) profit after costs. In the real world, you need fast execution and access to multiple markets because prices move quickly and converge once spotted. The window for arbitrage can be tiny, and profits can be eaten away by transaction costs, spreads, and taxes. This is distinct from hedging, which aims to reduce risk, from speculation, which accepts risk for potential gains, and from diversification, which spreads risk across assets to lower overall exposure. For example, if gold is priced lower on one exchange than another, you could buy on the cheaper exchange and sell on the more expensive one to capture the price difference.