By definition, arbitrage simply means the simultaneous purchase and immediate sale of an asset in order to profit from a difference in the price. Arbitrage exists due to market inefficiencies. Given the advancement in technology, it has become extremely difficult to profit from mispricing in the market. Many traders have computerized trading systems set to monitor fluctuations in similar financial instruments. Any inefficient pricing setups are usually acted upon quickly and the opportunity is often eliminated in a matter of seconds. One of the arbitrage opportunities is outward arbitrage.

Arbitraging is a crucial technique used in the market. Currently in the United States there are five different parity conditions that are the result from arbitraging activities. They consist of: The Purchasing Power Parity, The Fisher Effect, The International Fisher Effect, the Interest Rate Parity, and the Unbiased Forward Rate. Each of these conditions differs from each other slightly but based on the same assumptions.

There is a relationship between the money market and the foreign exchange market and there are five major theories that can be used to determine exchange rate levels.