Editing Arbitrage (section)

==Price convergence==
Arbitrage has the effect of causing prices, and thus [[purchasing power]],  in different markets to converge. As a result of arbitrage, the currency [[exchange rate]]s and the prices of securities and other financial assets in different markets tend to converge. The speed<ref name=DamghaniCointelation>{{cite journal |first=Babak |last=Mahdavi Damghani |year=2013|title= The Non-Misleading Value of Inferred Correlation: An Introduction to the Cointelation Model |journal=[[Wilmott (magazine)|Wilmott]] |volume=2013 |issue=1 |pages=50–61 |doi= 10.1002/wilm.10252}}</ref> at which they do so is a measure of market efficiency. Arbitrage tends to reduce [[price discrimination]] by encouraging people to buy an item where the price is low and resell it where the price is high (as long as the buyers are not prohibited from reselling and the transaction costs of buying, holding, and reselling are small, relative to the difference in prices in the different markets).

Arbitrage moves different currencies toward [[purchasing power parity]]. Assume that a car purchased in the United States is cheaper than the same car in Canada. Canadians would buy their cars across the border to exploit the arbitrage condition. At the same time, Americans would buy US cars, transport them across the border, then sell them in Canada. Canadians would have to buy American dollars to buy the cars and Americans would have to sell the Canadian dollars they received in exchange. Both actions would increase demand for US dollars and supply of Canadian dollars. As a result, there would be an appreciation of the US currency. This would make US cars more expensive and Canadian cars less so until their prices were similar. On a larger scale, international arbitrage opportunities in commodities, goods, [[Security (finance)|securities]], and [[currency|currencies]] tend to change exchange rates until the purchasing power is equal.

In reality, most [[asset]]s exhibit some difference between countries. These, [[transaction cost]]s, taxes, and other costs provide an impediment to this kind of arbitrage. Similarly, arbitrage affects the difference in interest rates paid on government bonds issued by the various countries, given the expected depreciation in the currencies relative to each other (see [[interest rate parity]]).