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Arbitrage profits

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2. What does the term arbitrage profits mean?

4. What are the differences between a forward contract, a futures contract, and options?

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Response provides guidance on the concept of arbitrage profits

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2. What does the term arbitrage profits mean?
As per investopedia arbitrage, is "the simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. "
Hence arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. An arbitrage profit has two characteristics:
1. The profit is risk-free.
2. One does not invest any of your own money.
Arbitrage profit can be achieved in various financial securities market.

4. What are the differences between a forward contract, a futures contract, and options?
A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. (Investopedia, 2009) Hence this is a contract which involves asset to be delivered in future at a specified price. Futures can be used for hedging ...

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