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Current time:0:00Total duration:2:51

Video transcript

the word arbitrage sounds very fancy but it's actually a very simple idea it's really just taking advantage of differences in price on essentially the same thing to make risk-free profit so let's just think about it a little bit let's say in one part of town there's some type of a market let's say it's a market for apples and let's say in that market apples sell for make up some some price let's say that Apple's in that market sell for $1 an Apple one dollar per Apple and let's say in another part of town you have another market another markets literally a fruit market and in that other part of town apples sell for apples sell for a dollar 50 an Apple a dollar 50 an apple so how could you take advantage and that we're going to assume that these apples are completely identical apples how could you take advantage in this price difference on these identical things to make a risk-free profit well ideally you would want to sell apples in the more expensive market where you could get a dollar fifty per Apple and you would want to buy apples in the less expensive market where you can get them for a dollar per Apple and that's exactly what you would do you would go does this market over here you would buy apples let's say you buy ten apples ten apples for ten dollars and then you would go maybe you know ride your bicycle a couple of blocks to the other market over there and you would sell your ten apples so this is buy ten apples for ten dollars and then you would sell you would sell those ten apples you would sell those ten apples for $15 $15 and so you would make an immediate risk free profit of five dollars you're buying for ten selling at five and you can just keep doing that over and over again and on as many on every trip as many apples as your bicycle can carry you'll just continue to make money and so this is what arbitrage is and just to imagine a side effect if someone did this enough then what it would do is it would increase the supply of apples he so the supply would increase in this market and on this market the demand would increase because there's someone who just keeps buying from this market and selling into that market so it's eventually going to happen when demand increases the price will go up in this market the price will go up in this market and when the supply increases in this market the price will go down so in theory the more you do this the more that you're going to make these prices come closer to each other and eventually you won't be able to make any profit at all but while there's this great discrepancy you have an opportunity for arbitrage