ABSTRACT
Arbitrage refers to the simultaneous sale and purchase of identical securities or other financial instruments on different markets to take advantage of price differentials for profit. When applied to the public sector, arbitrage involves state and local government use of proceeds from tax-exempt bonds on investments that yield a higher rate of return than the interest on the bonds themselves. The difference between the two rates is considered profit or arbitrage, and since 1986 must, with few exceptions, be rebated to the IRS. In the private sector, true arbitrage is completely hedged. In other words, both sides of the transaction are guaranteed at the time the position is taken so there is no risk of loss.
