An arbitrage activity that involves trading securities based on knowledge of potential future political activity. It may be country-specific or region-specific, depending on the type of political activity envisaged. Impending government elections in a given country may prompt political arbitrage specific to that nation, while the threat of a war that could encompass a number of countries may trigger political arbitrage across the entire region.
For example, if recent elections are likely to lead to the formation of a government that is not business friendly, a trader may short the benchmark equity index of that country in anticipation of a steep decline. As another example, if there is a distinct possibility of an imminent conflict in the Middle East, an arbitrageur or trader may short stocks of oil companies based in that region and initiate long positions on North American oil companies.
