What does "arbitrage" refer to in financial markets?

Arbitrage in financial markets refers to the practice of taking advantage of price discrepancies of the same or similar financial instruments in different markets or forms. When traders engage in arbitrage, they buy a financial asset in one market where the price is lower and simultaneously sell it in another market where the price is higher, capturing the profit created by the difference in prices. This practice is essential for maintaining market efficiency, as it helps align prices across various markets.

In contrast to the correct concept of arbitrage, the other options do not accurately define it. Selling a commodity at a loss does not constitute arbitrage, as it does not involve exploiting price differences for profit. Investing in stocks exclusively also does not relate to the fundamental idea of arbitrage, which is focused on price discrepancies rather than a specific investment vehicle. Lastly, evaluating market risks is a critical part of trading and investment strategies but does not pertain to the concept of arbitrage itself. Understanding arbitrage is crucial for grasping how traders can benefit from inefficiencies in financial markets.