What is Arbitrage? Find out here

Arbitrage represents the raison d’être of commodity trading. Traders try to generate profits by exploiting price differentials, be in geographical, product, or temporal form.

Geographical arbitrage

Geographical arbitrage represents a situation when one product can be sourced cheaper from a different location even when taking into account transportation costs.

This is the “simplest” form of trading; connecting areas of surplus to areas of deficit.

In other words, when there’s a high enough price differential between two locations, an arbitrage trader (aka as arbitragist) buys a cargo where it is cheap, then transports it to another geographical market, and sells it there for a higher price.

Product arbitrage

Product arbitrage represents a situation where the trader optimizes or substitutes the product sold for a more economical (yet contract-and-purpose compliant) solution.

Time arbitrage

Time arbitrage represents a situation where a trader profits from a commodity that has different pricing at different delivery times (immediate vs deferred delivery), taking into account storage and financing costs.

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