Arbitrage is an investment practice used to take advantage of price differences in different markets. This occurs with items that have identical characteristics and are perfect substitutes. Arbitrage has a major effect on the global financial sector. The logic behind this is that arbitrage affects exchange rates, interest rates, and inflation rates. Because many arbitrageurs believe it is important to buy low and sell high, the law of one price comes into play. This concept states that in an efficient market, all identical items should be the same price. Given this idea, there are five economic relationships that are involved, which are purchasing power parity, the Fisher effect, the international Fisher effect, interest rate parity, and forward rates as unbiased predictors of future spot rates.  When dealing with arbitrage situations, it is also very important to understand whether the foreign currency is as at a forward discount or a forward premium. A forward discount occurs when the spot rate is larger than the forward rate in terms of dollars. A forward premium would be when the spot rate is below the forward rate. A simple formula can determine this. Another important factor to keep in mind is that the exchange rates between goods and services will weaken given that the supply of currency enlarges compared to the supply of goods and services. On the other hand, inflation also has a tendency to make the money supply depreciate. This is because individuals domestically as well as internationally will not be able to purchase as much given the higher prices and current incomes.   While arbitrage is a great form of investment, it is necessary to understand that arbitrage opportunities quickly disappear. If a possible prospect is found, large sums of money can be made. It is all just based on the simple idea of buying low and selling high.