What is the meaning of arbitrage?

1. In theory,' arbitrage' is the simultaneous purchase and sale of two identical commodities or instruments to take advantage of price variations in different markets. For example, the purchase of gold in London and the simultaneous sale of gold in New York. 2. In practice, the term is used to refer to the simultaneous purchase and sale of any two contracts or commodities with largely offsetting risks. For example, the purchase of two-year Treasuries and the sale of futures contracts for an equivalent amount. 3. In municipal finance, the specific practice of investing funds obtained at a tax-preferred low rate of interest in higher-yielding investments until the funds are needed for the purpose intended.