What is "Arbitrage" in the context of commodities?

Arbitrage in the context of commodities refers to the practice of simultaneously buying and selling assets in different markets to take advantage of price discrepancies. This strategy allows investors to profit from the difference in prices for the same commodity across these markets. The essence of arbitrage lies in executing these transactions quickly and efficiently to lock in a profit before the price gap closes.

For example, if a commodity is priced lower in one market than in another, an arbitrageur would buy the commodity in the cheaper market while simultaneously selling it in the more expensive market, securing a risk-free profit without exposure to market fluctuations. This process plays a crucial role in maintaining market efficiency as it helps equalize prices across different exchanges.

The other options focus on different investment strategies or objectives. Long-term investments involve holding assets with the expectation of capital appreciation over time, while hedging refers to reducing risk against adverse price movements. Investing in mutual funds involves pooling money with other investors to buy a diversified portfolio of stocks or bonds, which is distinct from the specific mechanics of arbitrage.