Arbitrage involves several key concepts that are essential to understanding how it works:

1. Price Discrepancy: This is the core of arbitrage. It refers to the difference in the price of an asset or financial instrument between two or more markets. For arbitrage to be profitable, these discrepancies need to be significant enough to cover transaction costs and still leave a profit.

2. Simultaneous Transactions: To lock in a profit, arbitragers usually need to execute buy and sell transactions at the same time or within a very short timeframe. This reduces the risk of price movements erasing the potential profit.

3. Risk-Free Profit: Ideally, arbitrage involves minimal to no risk. The profit is considered "risk-free" because the arbitrager is exploiting a known price discrepancy rather than speculating on future price movements.

4. Transaction Costs: These are fees or costs associated with buying and selling assets. For arbitrage to be profitable, the price difference must be greater than the transaction costs involved.

5. Market Efficiency: Arbitrage plays a crucial role in bringing markets toward efficiency. When arbitragers exploit price differences, they help align prices across markets, which leads to a more efficient allocation of resources.

6. Types of Arbitrage:

   • Spatial Arbitrage: Exploiting price differences between geographic locations (e.g., buying gold in New York and selling it in London).
   • Temporal Arbitrage: Taking advantage of price differences over time (e.g., buying a stock when it is undervalued and selling it later when its price rises).
   • Statistical Arbitrage: Using mathematical models to identify price discrepancies between related financial instruments (e.g., pairs trading where a stock and its historical correlation are traded based on statistical models).

7. Arbitrageur: The individual or institution that engages in arbitrage. They are responsible for identifying and executing arbitrage opportunities and often use sophisticated algorithms and high-frequency trading strategies.

8. Market Impact: The actions of arbitragers can influence market prices. As they buy or sell assets, they help adjust prices and reduce discrepancies, contributing to market efficiency.