Describe 'arbitrage' in the context of commodity trading.

Arbitrage in the context of commodity trading refers to the simultaneous buying and selling of commodities in different markets or in different forms to capitalize on price discrepancies. This practice allows traders to exploit temporary differences in prices between two or more markets. For instance, if a commodity is priced lower in one market and higher in another, a trader can buy in the cheaper market and sell in the more expensive one at the same time, thus securing a profit with minimal risk.

The essence of arbitrage lies in its reliance on market inefficiencies. Price discrepancies may occur due to various factors, including supply and demand shifts, geopolitical events, or currency fluctuations. By engaging in this strategy, traders help to bring market prices closer together, contributing to overall market efficiency.

In contrast, other options do not accurately capture the essence of arbitrage. Holding onto a commodity until its value increases suggests a speculative approach rather than the immediate actions involved in arbitrage. Investing in commodities in a single market lacks the critical component of taking advantage of price differences across multiple markets. Finally, exchanging one commodity for another to balance a portfolio involves asset diversification rather than the specific activity of simultaneous buying and selling aimed at exploiting price differences.