Arbitrage is basically ensuring profit in a riskless fashion, thus generating abnormal returns. There are numerous ways to conduct arbitrage and with many financial instruments.

A guiding principle in investments is the Law of One Price. This states that the "same" investment must have the same price no matter how that investment is created. It is often possible to create identical investments using different securities or other assets. These investments must have the same expected cash flow payoffs to be considered identical. Indeed, the threat of arbitrage ensures that investments with identical payoffs are, at least on average, priced the same at a given point in time. If not, arbitrageurs take advantage of the differential, and the resulting buying and selling should eliminate the mispricing. (Billingsley)

The various types of arbitrage consist of the following few: Risk arbitrage, tax arbitrage and pairs trading. (Billingsley) These are the forms that aren’t riskless in nature however the concept of attaining potentially abnormal returns stays the same. Risk arbitrage is about the selling of the stock of a company purchasing another and the purchase of the stock of a company to be acquired, the risk in this is if the merger doesn’t happen, however if it does, the drop in the acquirers share price on top of the acquisition’s increase in share price would be a perfect example of an abnormal return in which one profits with both positions. Tax arbitrage entails the shift of income in an investment to another regulatory state with favorable tax advantages given that the tax rules don’t change often. Pairs trading consists of trading two similar stocks that have a very close correlation practically above 90% and trading the spread between the two instruments accordingly if price widens between both selling the overpriced and purchasing the underpriced instrument.

In conclusion arbitrage activity results in near market efficiency in which prices are eventually adjusted to their fair theoretical values due to these price discrepancies. The riskless forms are those that last for no more than a second and are nearly undetectable in the market. The forms that entail a bit more risk can still generate the excess returns however take more planning to execute, the law of one price exists only when arbitrage opportunities have been closed

References:

Billingsley, Randall. "Arbitrage, Hedging and the Law of One Price." Understanding Arbitrage (2005): Web. 1 Dec 2009. <http://www.whartonsp.com/articles/article.aspx?p=417513>.