Arbitrage

Um... this is a break from our regularly scheduled programming. We'll look at doubles and accumulators next time. Right now I wrote an article on Helium about arbitrage which I thought I should reproduce here.

Arbitrage is the practice of making two or more financial transactions in such a way as to tie in a guaranteed profit. An example in the stock market world would be to buy a share at one price and simultaneously sell it for a higher price.

In gambling terms, an arbitrageur backs all of the possible outcomes in an event in such a way that any outcome results in a profit. An example would be to back one tennis player at 2.10 with one bookmaker and his opponent at 2.10 with another (staking GBP1 on both). Whichever player won, you would win 2.10 less your stakes, making a guaranteed profit of 10p.

In general, if you are to back one player at decimal odds of d1 and another at d2, you can arbitrage only if 1/d1 + 1/d2 < 1 (in the above case, the sum is about 0.95); to guarantee the same profit in either case, you will need to place stakes in the ratio (s1/s2) = (d2/d1) (i.e., so your stakes multiplied by the odds are the same). This is intuitive - you need to put more on the favourite than on the underdog to get the same return. Your profit will be s1.d1 - (s1 + s2).