Arbitrage trade

An arbitrage trade in shipping moves cargo, or takes offsetting freight positions, to capture a price differential between two regions or two markets. In commodity terms a trader books tonnage to lift a cargo where it is cheap and deliver it where it is dear, with the freight cost being the gate: the arbitrage opens only when the destination price minus the origin price exceeds the all-in freight plus financing. In freight derivatives, an arbitrage can also mean trading the spread between a physical voyage rate and the paper FFA, or between two correlated routes. The trade closes the differential and is self-extinguishing once the spread narrows to cost.