Arbitrage
In the municipal market, the difference in
interest earned on funds borrowed at a lower tax-exempt rate and interest on
funds that are invested at a higher-yielding taxable rate. Under the 1986
Tax Act, with very few exceptions, arbitrage earnings must be rebated back
to the federal government.
REMARKS: In economics and finance, arbitrage is the practice of taking
advantage of a price differential between two or more markets: a combination
of matching deals are struck that capitalize upon the imbalance, the profit
being the difference between the market prices.
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When used by academics, an arbitrage is a
transaction that involves no negative cash flow at any probabilistic or
temporal state and a positive cash flow in at least one state; in simple
terms, a risk-free profit. A person who engages in arbitrage is called an
arbitrageur. The term is mainly applied to trading in financial instruments,
such as bonds, stocks, derivatives, commodities and currencies. |
