The final section of the book discusses arbitrage. The formal definition of arbitrage is the achievement of guaranteed profits by simultaneously buying low and selling high.
In practice, a guarantee is almost impossible. Traders buy and sell securities that are almost the same to achieve a profit, sometimes incurring massive losses when their trades fail to diverge.
Arbitrage is too mathematical for a retail investor blog.
I will just briefly describe the sub-sections of this book under the Arbitrage trading section :
a) Fixed Income Arbitrage
Fixed income arbitrage covers the buying and selling of bonds of make a profit. One approach is based on trading the slope of the yield curve. If long term yields are expected to drop but short term yields are expected to rise, one form of arbitrage would be to simply buy 10-year bonds and sell 2 year bonds. Mathematical formulas employing bond duration …