An arbitrage is a trade that produces near risk-free and near guaranteed profits.  In general, independent and retail traders are not successful as arbitrageurs.  We’ll get into the reasons why in a bit.  But it’s still important to understand how arbitrages work, because they’re a fundamental part of the structure of the market.  Each arbitrage defines an equation, for lack of a better word, of how the prices of various instruments should be related to each other and to interest rates.  Some of these relationships are trivial to understand, but others are far from obvious. Continue reading →