Legal Definitions - kind arbitrage

Definition: Kind arbitrage is a type of arbitrage where a security is purchased that can be exchanged or converted to a second security within a reasonable time, with a simultaneous sale of the second security.

Example: An investor purchases a convertible bond that can be exchanged for common stock within a year. At the same time, the investor sells short the common stock of the same company. If the price of the common stock goes down, the investor can profit from the difference in price by exchanging the convertible bond for the common stock and selling it at a higher price.

This example illustrates how kind arbitrage involves taking advantage of price differences between two securities that are related to each other. In this case, the convertible bond and the common stock of the same company. By purchasing the convertible bond and selling short the common stock, the investor can profit from any price differences between the two securities.